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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

February 5, 2004

"Pros and Cons of Refund Anticipation Loans"

Around this time of year, millions of Americans go into the office of their local tax preparer and hope to get as big a refund as possible from Uncle Sam. Lots of us seem to be in a big hurry to get those refunds, and so we sign up for what are known as Refund Anticipation Loans, or RALs for short. For the 2002 tax filing year, 12.7 million Americans took out RALs to get their refund money faster. The advantage is that you get your refund check very quickly or, in some cases, right away.

The disadvantage is that you pay very high fees and extremely high effective interest rates in order to get at your money two or three weeks earlier than you might have gotten it if you waited for the check from Uncle Sam. A recent report from the Consumer Federation of America (www.consumerfed.org) and the National Consumer Law Center (www.consumerlaw.org) found:

  • RALs cost Americans $1.1 billion in loan interest per year and $406 million in transaction and other administrative fees. The average RAL for $2,100 costs $132 in fees and $120 for tax preparation services.
  • RAL interest rates range from 70% to as much as 700% on an annualized basis on the loan interest only. If you count the administrative fees as well, the effective APR can be as much as 1,837%!
  • Over half of consumers using RALs (55%) are low-income workers receiving an Earned Income Tax Credit, and they can hardly afford the $525 million in RAL interest they were charged to get their money two weeks sooner. In many cases, those people take their RAL checks to a check-cashing store and get charged another fee on top of the RAL fee.
  • The latest twist is preparers are allowing you to load your refund money into a prepaid "stored value" card so you can spend the money in a supermarket or a gambling casino right away. These cards are aimed at the 25 million Americans who don’t have regular bank accounts or credit cards. Of course, people are charged fees for getting these cards and transaction fees every time they use them.
Some states including Massachusetts, Illinois, Minnesota and New York have passed laws requiring more disclosure about the cost of RALs, but it doesn’t seem to have slowed down the industry one bit. The IRS, on the other hand, has been making it easier for tax preparers to offer RALs because it screens applicants to tell the preparers if they are going to qualify for a refund.

If you want a free brochure about RALs from the National Consumer Law Center called "Don’t Pay to Borrow Your Own Money — the Risks and Costs of Tax Refund Anticipation Loans," go to their Web site at www.consumerlaw.org, or write to them at 77 Summer Street, Boston, Mass.02110. Their phone is (617) 542-8010.

I know it’s great to get at your money right away when you are expecting a refund, but it is much cheaper to wait two weeks to get your refund directly from Uncle Sam.

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