Tax Refund Loans Could Be a Thing of the Past

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Mar 21st, 2011 @ 10:14 AM by Debbie Dragon
In past years, many nationally known tax preparation companies offered Refund Anticipation Loans, otherwise known as RALs to their customers. RALs allowed those who were receiving a tax return the ability to get an instant loan against their return within just a couple of days. The loans have been criticized and even called predatory by many consumer advocates over the years, since they targeted low income earners who were strapped for cash. While they do allow those who need cash quickly the ability to get it, they come at a very steep price tag, some with interest rates well over 100%.
For many years the IRS helped support these loans providing lenders information on whether the tax payer would receive their full refund, or if part of it was already marked to pay off a bad student loan debt or child support, for example. However, last summer the IRS announced they would no longer help support these loans.
Doug Shulman, IRS Commissioner, said these loans are just not necessary for many individuals today, especially for those who e-file and can receive their return in just 10-14 days.
While there are still companies out there that will offer RALs for loans against your 2010 tax return, many tax preparation companies, including H&R Block, have stopped offering the loans claiming they can't get their lenders to back them without the verification from the IRS.
A recent study found that last tax season, just over 7 million American taxpayers took advantage of an RAL. In fact $606 million dollars in loan fees were distributed. The study was done by the Consumer Federation of America in conjunction with the National Consumer Law Center.
“These are conservative numbers,” said NCLC Attorney Chi Chi Wu. “We will be glad to see the last of these high-cost, high-risk loans.” Wu said some RALs have a whopping 149 percent annual percentage rate.
Many consumers who took advantage of these loans in the past did so because of a couple of factors. While many needed the cash fast, others took the loans because it was their only means to pay their tax preparation fee. Still others did not have a bank account and this was the easiest route for them to receive the cash from their refund. Perhaps the biggest criticism of these loans is that they were given to mainly low income earners. Consumer advocates were highly against these loans saying they took advantage of those who needed their full tax refund the most.
Individuals who would have received an RAL in the past are being encouraged by The Consumer Federation of America to “open a checking or savings account to get the speed and convenience of an IRS direct deposit without paying all the extra fees,” said Jean Ann Fox, CFA’s financial services director. “You can still get a refund in less than two weeks without draining off a significant amount of money in unnecessary fees.”
About Debbie Dragon
Debbie Dragon is a full time freelance writer and the co-owner of ReliableWriters.com.
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