This is the last year tax filers will be able to get a refund anticipation loan (RAL) offered by banks. As of 2012, the Internal Revenue Service (IRS) will no longer provide tax preparers, banks or lenders with the “debt indicator”, which lists any outstanding debts that will be deducted from the refund, such as delinquent student loans and child support. This information was the basis used to approve refund anticipation loans. Because of a lawsuit, only one bank, Republic Bank and Trust Company of Louisville, Kentucky can offer these loans until April 15, 2012. After that, no bank will be able to offer this loan.
What are Refund anticipation loans?
These loans are right up there (or down there) on my list with prepaid debit cards…they’re poor choices. These loans are secured by the taxpayer’s expected tax refund. These loans are offered by one bank now through a few tax preparers. The loan is usually for a short period of 7 to 14 days, until the Internal Revenue Service pays the refund. The tax payer is charged very high Interest rates and additional fees. Since this loan is offered through a tax preparer, there is a tax preparation fee, interest on the loan and fee to open a temporary bank account. There may be additional fees such as application, administrative, e-filing, transmission, or “processing.”
For example, a $1,500 loan for 12 days is charged $61.2 interest, which is 124 percent APR (annual percentage rate). In addition, there is a $30 fee to open a bank account and $189 average tax preparation fee. The temporary bank account is set up for the IRS to deposit the money and then the company issues a check to the taxpayer minus the fees.
The main reason taxpayers apply for the refund anticipation loan is the immediate need for money. These loans are marketed to low income taxpayers through tax preparation companies, such as Jackson Hewitt and Liberty Tax Service. H&R Block no longer offers this loan.
Never fear, just because banks won’t be offering these loans, there will be other companies offering similar loans, such as payday loan companies. Payday lenders are considered non-banks and have different regulations than banks, so payday loan companies could provide the tax advance loans to tax preparation companies. These loans have been called cash advance loans and fast refunds, with interest rates just as high or higher than the refund anticipation loans. Don’t get any type of loan based on your tax refund.
An alternative to the refund anticipation loan is e-filing. With e-filing you get the refund directly deposited into your bank account within 8 to 15 days or deposited to a prepaid card you already have. Beware of the fees on the prepaid card.
You have to pay a tax preparation fee in order to get the tax refund loan. You don’t have to pay to have your taxes prepared; there are free tax preparation services for low income individuals,
Even if you e-file and don’t apply for a loan, it is a good idea to have a checking account; you avoid paying check cashing fees to get your refund. If you don’t have one, open one at a bank or credit union that offers free checking.
Can’t you wait two weeks to get your tax refund? Avoid getting the loan, It will save you money.
Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.