Tax Refund Anticipation Loans May Be More Costly Than Waiting for the Money

tax refund anticipation loansIt might be tempting to take out a refund-anticipation loan to get quick cash, but in some cases the time these high-interest loans might save doesn't make up for the money spent on fees.

"Taxpayers should be wary of refund anticipation loans, and resist the temptation of getting only some of their money today," Thomas R. Calcagni, New Jersey's Acting Director of the State Division of Consumer Affairs, said in a statement. "Instead, they can receive their full refund in just three weeks or less by filing their tax return electronically and opting for direct deposit to their bank account."

New Jersey was among governments and business groups warning consumers about the loans and the high interest rates and fees connected with them. The Center for Responsible Learning said the annual interest rate for refund loans can be from 50% to 500% and typically also include administrative fees. The group also warns if the amount of the tax refund changes or the IRS denies the refund, the consumer is still on the hook for the loan amount.The center said New Jersey and Illinois are among the 17 states with regulations governing the tax loans. Chicago took the step to urge consumers to get the following costs in writing before agreeing to a loan:
  • Fees charged for tax preparation
  • Fees for facilitating the loan
  • The loan's annual percentage rate
  • The loan's total cost
  • The estimated date the consumer can get the loan money
New Jersey recently scoured 574 tax preparation offices throughout the state to check up on false and misleading advertising of "instant," "same day" and "24 hour" tax refunds -- really just refund anticipation loans with a different name.

"The promise of fast cash and an instant refund can be very attractive, especially in times of economic hardship," New Jersey Attorney General Paula T. Dow said in a statement. "But tax preparers who offer so-called same-day refunds are selling something that does not exist, typically at a high cost to the buyer." The New Jersey investigation found five businesses allegedly hawking the instant refunds and is pursuing fines in those cases.

Consumers don't have to take a tax loan out with their tax preparers, said the Better Business Bureau chapter in Lafayette, La. That group also warned a default on a tax loan could damage a consumer's credit report, one of the financial pitfalls of these types of loan.
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