Expecting a tax refund? Donít pay to borrow your money
Sandra McKinnon, MS
Family Financial Education Specialist
Would you agree to borrow your own money at a rate of up to 1700 percent?
Thatís what many tax payers are paying to borrow the value of an anticipated
tax refund, according to the 2005 Refund Anticipation Loan Report from the
National Consumer Law Center (NCLC). Over 12 million taxpayers got refund
loans during the 2004 filing season.
Refund anticipation loans (RALs) are short-term cash advances to
clients who expect refunds. The loan is secured by the taxpayerís expected
refund. Refund loans are typically extended for less than two weeks. RALs
are offered by paid tax preparers, check cashers, payday lenders, used car
dealers and title loan lenders.
A nationwide survey of consumers commissioned by the NCLC found that 18 percent had taken out a refund loan at some point. Of these consumers, a startling two-thirds did not realize a refund loan is a loan.
Many refund anticipation loans go to low-income customers. The latest data shows that 56 percent of refund loan customers, or roughly 7 million families, received the Earned Income Tax Credit, the largest federal poverty assistance program. These cash-strapped taxpayers are typically caught in the vicious cycle of circumstances. Getting one of these loans can take a huge bite out of a tax refund.
Consumers paid an estimated $1 billion in RAL fees, plus an additional $389 million in administrative or application fees in 2003 to get quick cash for their refundsóessentially borrowing their own money at extremely high interest rates. The effective annualized interest rate for RALs, based on a 10-day loan period, ranges from about 40 percent (for a loan of $9,999) to over 700 percent (for a loan of $200). If fees are included, the rate could be 70 percent to over 1700 percent.
Itís not often necessary to turn to costly loans and services. Take advantage of todayís technology to get your tax refund quickly:
File your return electronically.
Do even better by direct depositing your refund. Youíll see the refund in your bank account in 10 to 14 days. Plus itís added protection against lost or stolen refund checks sent via the mail.
If you do not have a bank account to take advantage of direct deposit, check out "Get Checking." This University of Missouri Extension workshop can help you to access checking account services. Having an account is less expensive than paying for check-cashing services and money orders. "Get Checking" workshops are available throughout east central Missouri. They offer the opportunity to open an account with a participating financial institution even if youíve had problems in the past. Call 636-970-3000 or visit:
Free tax preparation assistance available for qualified families
If your family has low to moderate income, you may be eligible to get free help to fill out and file your tax return. The Volunteer Income Tax Assistance (VITA) program, sponsored by the IRS, has trained volunteers to fill out and electronically file tax returns for low- to moderate-income families. Call 1-800-829-1040 to find the closest VITA site.
AARP Tax Counseling for the Elderly is available in many communities. AARP sites sometimes provide services to low- to moderate-income taxpayers.