Every year, when the tax season comes around again, taxpayers are encouraged to take advantage of offers of tax refund loans, which are often called refund anticipation loans. It is loans like these that are often advertised as being instant tax refunds by some tax preparation firms.
In reality, though, tax refund loans are little more than extremely expensive short term loans, even though the TV adverts and advertising brochures promote them more as a means of obtaining a tax refund faster. Before you go straight to your local tax preparation company and sign up for a refund anticipation loan (RAL), you need to be aware that high-cost tax refund loans are not the only way speed up your tax refund, there are other ways to speed up the process that are completely free.
People who use tax refund loans need to be aware that they are paying a very high price to borrow money that is already theirs. Tax refund loans often have costs that are hidden and those costs can often be very expensive. Before you go ahead and borrow money that is already your own, simply because you can’t wait for your refund to arrive, make sure that you fully understand how much it is really going to cost you to borrow money against your tax refund with a refund anticipation loan.
Taxpayers can have their taxes prepared for free, electronically, at any number of different free tax preparation websites. These sites are commonly known as VITA sites, or Volunteer Income Tax Assistance sites. By completing and e-filing a tax return, a tax refund can be deposited into a taxpayer’s bank account within just a few days, and it’s all completely free of charge. However, if a person does not have a bank account, that is when they will usually pay for a tax preparer and also pay the extra cost to obtain a tax refund loan in order that they can obtain quicker access to their tax refund money.
To help those people with who are faced with this lack of bank account issue, a number of VITA sites have now made arrangements with local financial institutions that will enable the so called ‘unbanked’ taxpayer avoid the cost of a tax refund loan by opening a personal savings or checking account when they visit the VITA site. By opening a bank account, the taxpayer can receive their tax refund in just a few days. In addition to that, opening a bank account also allows people to improve their credit scores and it will save the money that they would have been spending on check cashing facilities.
It should also be remembered that, if the Internal Revenue Service deny or delay a tax refund for any reason, a person who has taken out a tax refund loan will become personally responsible for repaying that loan, along with the fees and interest, both of which will usually increase dramatically after a period of ten days.
Before it was possible to file e-returns, these types of loans were attractive, because it could take several weeks for paper based tax returns to be processed. Today, however, e-filing has meant that federal and state tax refunds can be available within a matter of a few days when they are deposited directly into a personal bank account and this is at no extra cost at all to the taxpayer. No one should really have to pay for a loan to gain access to money, which is already rightfully their own.
The pressure to take out a tax refund loan can be tempting. The advertisements use words such as express refund, instant refund, and rapid refund when, in reality, what they are advertising is nothing more than a loan that the consumer will have to pay back with their tax refund.
The other thing to bear in mind is that the amount of tax refund, when it does arrive, will be reduced by the repayment of the interest and fees that have been accrued on that loan. In order to make a profit on these small loans, loan companies charge very high interest rates, which often exceed an APR of 500%. It is also quite usual for lenders to charge administration fees of around $30. That, of course, is the price that you pay for receiving your tax refund immediately. However, it should be remembered that an RAL is not an instant refund; it is an expensive way to borrow your own money.
Tax refund loans can become a problem when borrowers don’t realize that receiving their tax refund quicker will mean that they will not get the full amount that they owed by the government, because of the cost in interest and fees on the loan. Tax refund loans are also marketed directly at those people who are living from one paycheck to the next, and they are the people who would benefit the most from receiving their full refund, rather than paying fees and interest on an expensive loan.
The thing to remember is that, if you file your return electronically, you can receive your refund in just a few days and save hundreds of dollars on an unnecessary and expensive refund application loan.
Almost 40% of those people who take out refund application loans are eligible for Earned Income Tax Credit, which is made available to families in a low income. It is families like these that the EITC is designed to help that will often be the families that find themselves in need of an RAL.
When filing taxes, families who have an annual income of less than $35,000 and individuals who earn less than $11,000 a year are generally eligible to receive an EITC from the federal government and from state and city governments. Taxpayers should check to see if they are eligible for an EITC, especially if they have never claimed before, because they can apply of up to three years’ worth of back EITC if they are eligible. Claims for an EITC can be made through electronic tax filing and a person who is eligible for an EITC will also be eligible for free tax filing, online, or with a tax preparer. In addition to that, 70% of all taxpayers are entitled to free electronic filing and free tax preparation software. These both help to eliminate the need for RALs and it also removes the need for accountant’s fees. Taxpayers who have an adjusted gross income of less than $50,000 will also qualify for free filing. You can find further information at: www.irs.gov.
If consumers do find themselves in urgent need of funds during the tax season, there are much cheaper and better ways to borrow the money needed to rectify the situation. If a consumer finds that they are unable to pay a bill, they should contact the supplier immediately to explain the situation and request that a payment plan be put in place.
If a consumer still finds that they need to raise funds quickly, they should consider a short term loan from a licensed lender. Short term loans are subject to usury caps, so the consumer is protected. If a consumer does decide to apply for a tax refund loan, however, it is important that the fees, interest and repayment terms are properly disclosed in a manner that is easy to understand, especially if the consumer’s first language is not English, so that the borrower is not misled into thinking that they are receiving their tax refund early, when in reality they are taking out an expensive loan.