Will Tax-Refund Loans Fade Away?

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taxesWant your tax refund faster?

Rather than wait for a refund check to come in the mail or be direct-deposited into a bank account, some taxpayers opt to get it immediately. For a price.

They use what’s officially called a Refund Anticipation Loan, or RAL. Consumer groups derogatorily refer to them as tax refund “quickies.”

Long offered by some of the nation’s biggest tax preparation companies, RALs are short-term loans backed by the “anticipated” tax return. You get your money fast, usually within one to two days, but with hefty fees deducted.

Typically marketed to low- or moderate-income individuals, RALs are touted as a “financial lifeline” providing instant cash to help pay bills or unexpected expenses.

But they don’t come cheap. And under scrutiny by consumer groups and others, they may be heading toward extinction.

In recent months, a number of big-name tax preparers, including H&R Block, have stopped offering RALs because their banking partners have been forced to back out by federal regulators.

About 7.2 million U.S. taxpayers used RALs in 2009, paying about $606 million in loan fees, plus an additional $58 million in add-on charges, according to a recent study issued jointly by the National Consumer Law Center and the Consumer Federation of America.

“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.” Some RALs, Wu said, have a whopping 149 percent annual percentage rate.

Wu and other consumer advocates believe RALs are predatory and prey on low-income people who don’t have bank accounts but need cash quickly.

They’re also a way for cash-strapped consumers to pay their tax preparation fees. With an RAL, the fee is deducted from the refund.

Deborah Wakeman, owner of a Liberty Tax office in Sacramento, said RALs are “for instant gratification. They’re for the person who wants that refund in one to two days.”

But this year, a combination of smaller RAL loan amounts, more stringent requirements by banks and money-cautious consumers has resulted in fewer of the loans being issued, she said.

“People are more cost-conscious and they’re looking at the fees,” she noted. Liberty’s tax guide clearly states that its RAL carries an effective APR of 124 percent.

Last year by this time, her office had done 58 RALs; this tax season, only nine.

In many cases, taxpayers are deciding it’s worth it to wait eight to 15 days for their refunds.

Liberty and Jackson Hewitt Tax Service, both national chains, are among the few tax-preparation providers that still make RALs.

Jackson Hewitt, for instance, advertises refund anticipation loans to consumers on pink fliers and on the company’s website: “Need Money Now? … Get $1,500 in as Little as 1 Day!”

Both Liberty and Jackson Hewitt offer tax refund loans — issued through Kentucky-based Republic Bank — that are limited to $1,500, based on a total refund of $2,000. (In previous years, RALs were issued in amounts up to $7,500.)

Taxpayers pay $61.22 in RAL fees, an effective APR of 124 percent, based on a 12-day loan.

If the refund is larger than $1,500, the balance is paid to the taxpayer by direct deposit or a check, or loaded onto a prepaid debit card. Some options require an additional $30 administrative fee, charged by the bank. There are often fees attached to the issuance of paper checks and debit cards.

The IRS has played a role in the fading popularity of RALs. For years, the IRS supplied tax-prep companies and financial institutions with a “debt indicator,” which showed if a tax refund was going to be reduced to pay delinquent student loans, child support or other unpaid loans. That information helped financial institutions backing the tax refund loans determine how much they could lend.

Starting this tax season, however, the IRS no longer provides that information. In announcing the change last summer, IRS Commissioner Doug Shulman said it was a matter of changing times.

Noting that RALs are often targeted at lower-income individuals, Shulman said, “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”

Although the IRS has no authority to ban RALs, its decision to stop providing debt information to tax preparers and lenders has effectively cut off the oxygen. It’s given impetus to federal regulators to forbid or discourage banks from backing RALs, in part because they are now considered riskier.

To some extent, advance loans for an IRS refund may be less necessary than in years past. On e-filed tax returns, refunds usually arrive in 10 to 14 days, depending on whether they’re direct-deposited to a bank account or sent by mail. With paper tax returns, it takes four to six weeks to receive a mailed refund check.

For cash-strapped consumers, a tax refund can be a huge windfall. But using RALs can “take another bite” out that refund, especially for those who don’t have regular bank accounts.

That’s why groups like the Consumer Federation of America encourage taxpayers “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.”

On a recent afternoon at a Liberty Tax office, Whesleigh Bouie, a 25-year-old American River College student, was completing his state and federal tax returns. He’s getting a small refund. Would he consider an RAL to get a quick turnaround on his money? Never.

“It’s like a payday loan … the fees and finances are too high,” said Bouie.

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WAYS TO GET YOUR REFUND:

Direct deposit: Taxpayers who file electronically and choose IRS direct deposit to a bank account can receive their refund within 10 days.

Paper refunds: It usually takes up to 14 days for a paper check to be mailed to e-filers; for those filing a paper return, it can take four to six weeks to receive a paper check in the mail.

Payroll cards: If you already have a payroll card through your employer, you can have your IRS tax refund deposited onto your card.

Pre-paid debit cards: This year, the U.S. Treasury Department launched a pilot program that lets 600,000 taxpayers who don’t have bank accounts receive their tax refund on a prepaid debit card that can be used anywhere. It’s a trial program available only to those who received a Treasury letter.

Tax preparer’s debit cards: Companies that prepare your taxes usually offer Visa-type cards that can be loaded with your refund. Tax preparers can also issue refunds by paper check; in both cases, extra charges may apply.

Source: McClatchy-Tribune Information Services.