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Why You Should Beware of Tax-Refund Loans

tax refund loan shark
Hemera/iStockphoto

It takes at least a few days, sometimes longer, to receive your refund after you’ve filed your taxes with the IRS. Some people, though, just can’t seem to wait. This almost certainly is a bad decision.

Not long ago, banks offered something called refund-anticipation loans, which basically meant that a bank would immediately lend you a portion of what you expected your refund to be, while keeping the rest for itself as a fee. Federal regulators put an end to this practice, but others—payday-loan companies and cash-advance businesses, even some otherwise reputable tax-preparation firms—have stepped in to offer pretty much the same thing.

The problem with this sort of transaction is that, while you do get the money almost right away, you’re paying an absurdly high premium for it. Here are some examples of this kind of financial product currently being offered by leading tax companies:

  • Liberty Tax Service charges a $50 fee plus a 36 percent interest rate
  • Jackson Hewitt will extend you a line of credit (up to $1,000), but it comes with a 35 percent interest rate plus a monthly fee of $6.25, and a 3 percent (or $10, whichever is larger) charge every time you use your new credit line
  • AIT Financial Group will give you $600 in anticipation of a $700 refund. In other words, you pay them $100 in order to get your refund a few days earlier. You can also choose to give them $250 in order to get $1,000 out of an expected $1,250 refund.

Now, if you’re in an emergency and you absolutely need the money right away, now now now, we understand. Take the loan, pay the (ridiculously high) fees, and handle your business. But if there’s any way to avoid it, you should.

Here’s a tip: Just wait for your refund to arrive. It really doesn’t take that long, and you won’t have to give away an absurdly large chunk of it for no good reason to people who aren’t actually doing anything to help you.

[CNN]

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