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Don’t Get A Refund Anticipation Loan

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Every year millions of hard working Americans will walk into a tax preparers office to get their taxes done. A small subset of those hard working Americans will agree to a tax rebate loan, sometimes called a refund anticipation loan, without fully understanding how ridiculously expensive they are. Sometimes they aren’t well informed, sometimes they are simply strapped for cash, sometimes they just don’t do the math and don’t realize they’re getting the short end of the stick. Ultimately I believe the responsibility falls on the consumer to understand it because the tax preparation companies disclose everything. They tell you exactly what you’re paying, they don’t make the information difficult to find (I found H&R Block’s RAL information within two minutes), and it’s always on the consumer to be aware of what he or she is signing.

That being said, I feel that it’s my responsibility to at least write a little about how absolutely ridiculous these types of loans are. According to the IRS, if you e-file and select direct deposit as one of your options, you should get your refund in an estimated 8 to 15 days. Eight to fifteen days. That’s it! You could file right this second and get your refund in time to make rent at the end of the month. That’s how quick it is.

So, in order to get your own money back a little quicker, people are turning to loans? I had no idea how expensive they were until I looked at actual pricing information. Check out this H&R Block Refund Anticipation Loan pricing sheet (I found this in two minutes, no joke). Let’s say you are going to get a $2,000 check directly from H&R Block, rather than waiting the 8 to 15 estimated days it’ll take for the IRS to direct deposit the funds to your account. How much will you pay?

  • Activation Fee: $29.95 right off the bat to even play the RAL game.
  • 36% APR: That’s the interest rate of the loan you’re getting! Thirty-six percent APR! People scream about how credit card companies are predatory and the highest rate they charge, when you start defaulting on payments, is 29.99%! (That’s Citi’s default rate)
  • Check Processing Fee: Another $20 fee to “process” your check.

So, on a $2,000 check they estimate that it’ll have fees of about $71.41, or about 3.5%. $71.41 is the price of a nice dinner for two. $71.41 towards your credit card debt will find you closer to freedom. Paying $71.41 to borrow money from your future self (in 8-15 days too)… that’s an outstanding ripoff. The lower the amount you get back, the more exorbitant the fees look. If your RAL is only for $200, then you’re paying $52.09 in fees which makes it an unfathomable 26%. That’s like me reaching into your pocket and swapping out all your twenty dollar bills with fifteen dollars bills. You think that sounds ludicrous? Think of how many people accept those fifteen dollars bills!

Are you really that strapped for cash? If so, that’s totally understandable. The solution isn’t a refund anticipation loan, the solution is to file your taxes right this very second. You can find an IRS sanctioned tax preparer that will help you prepare and e-file you taxes for free (if you qualify). Then, the next step is to adjust your withholdings so you aren’t over-prepaying your taxes next year. The last resort is a refund anticipation loan.

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14 Responses to “Don’t Get A Refund Anticipation Loan”

  1. I think the problem is that those people consider the refund found money, so what’s a fee gonna matter when the money came for free. Yikes!

  2. Lily says:

    I saw a horrible H&R Block refund anticipation loan commercial during the Super Bowl. One guy was eating ketchup, so his buddy made fun of him for this stupid money-saving scheme. The buddy brags about how he’s saving money through a refund anticipation loan that H&R Block put onto a debit card for his convenience. I almost threw up the delicious artichoke dip I made for the game. :(

  3. mr hubbard says:

    AMEN! Anticipation loans are almost evil. Another part to keep in mind: the company extending the loan takes on zero risk. The pay you early, then when the refund is processed it goes directly to to them, so there isn’t the possibility of default. Interest rate goes up as risk of default goes up. Here’s is a loan with no chance of risk, but a massive interest rate.

    But let’s be honest: This is stupid tax.

  4. Curtis says:

    I remember sitting in my Managerial Accounting course with an instructor who ran a CPA firm. He said he used to offer those loans through the software vendor he used, but didn’t advertise it. He quite after this example he gave us.

    An older, retired woman insisted on getting the refund anticipation loan. The CPA firm didn’t get much for doing this as it was mostly fees processed through the software vendor. So, he did what she asked and provided her the “loan” and charging the stated fees. He ran into her around town a couple months later and asked what she had used her refund for this year. Her reply, “Nothing, I just put it in the savings account!”

    Can you imagine? Spending all those fees just to stick it in a bank savings account probably earning less than 1%. And that just to get the refund a week early.

  5. JRich says:

    Great post.

    I’m happy to say that I owe $1300 to federal + state. I had my deductions at 25 for the first 9 months of the year and paid no taxes. Then I paid all my taxes in the last 3 months and will finish paying in April.

    Rather than giving too much and giving the govt a free loan… then paying extra to get it back, people should take their own free loan from the govt.

  6. Traciatim says:

    H&R Block Canada lists their details as this:

    “If you qualify for Instant Cash Back, we’ll give you 85 percent of the first $300 of your income tax refund and 95 percent of the rest. For example, if you have a $600 refund, the amount you’ll receive from H&R Block is $540. The $60 fee covers the entire cost of the Instant Cash Back service, including tax preparation. ”

    So for your example of the $2000 back they would keep $130.00 . . . all for the “convenience” of loading up a debit card with cash that doesn’t earn any interest.

    Also, there are more fees involved:

    ” Debit payment – $1.50 for each debit purchase
    Interac ATM fee – $1.99 for each withdrawal
    Trace fee – $0.50 for transaction investigations
    Inactivity fee – $3.95 for 90 consecutive days of non use and every 30 days thereafter.”

    Also, since you can only take $20.00 out of most bank machines, you’re probably going to leave ‘a few bucks’ on this card in the end that’s completely free cash for H&R Block.

    I hope all of their building burn to the ground in off business hours.

  7. Moneymonk says:

    A RAL Loan has to be the worst thing next to a payday loan

  8. RacerX says:

    H&R actually makes people think that it is the governments money…it isn’t…it is yours! You overpaid. It isn’t because you’re cute…

    Run Forrest!

  9. marissa says:

    i got a refund loan this year and may never do this again. i got the loan because i filed the taxes the beginning of March 2008. they said to expect the direct deposit within 8 to 15 days. last year the same time frame, and the money was there three weeks later. this year, my son’s electronic bracelet, which caused us much emotional distress, surveillance, and limited his activities to i did have to shop and bring him food, the refund loan guaranteed the money would be there to pay off the bracelet expense. we did have until March 17, 2008 to come up with the money, or the bracelet and all the complications, surveillance, my son’s emotional edginess at being allowed freedom, although walking outside to a van parked with men in badgeless uniforms clearly displaying holstered guns was becoming distressful for us and the neighbors. the refund loan was a godsend. it guaranteed they got the final payment for the bracelet, and they took the bracelet and their monitoring equipment. they also intend to move him from this very intense unit, as it has impacted his abillity to get an interview where i work, because of the intense surveillance. i live within my means, although for the mental health benefits of this instant cash, and the extremes to which i have gone to stay within the law and remain with no complaint, the cost of his release from this unit and surveillance is no less than “priceless”. there are human reasons people do take these refund loans, and thank god and the goodness in life it is there for us and our families whom need this once in a lifetime loan. my son is young, and on the right path. they pulled him back so many times, for so many nameless and unspecified reasons, i paid $2000 before X mas to get him released before the holdiays, and this much more to get this bracelet removed. my son’s freedom, and my saneness and our familys’ release from this system is all i have worked for. i am now saving for a down payment for a home, and my son works every day. he works to control life with his freedom, and i have to credit him, very few 19 year olds could survive the years he did with the friendly peaceful attitude he did have and maintains today. he did learn to do the things he was wrongfully accused of,to survive, and accepts he did in there the things he never did, and never intends to relive.
    God bless my son and my family, he is determined become a loving father and a success. he works every day and has much common sense.

  10. Relevance says:

    I don’t see the attraction of these rapid refund loans myself, but I also don’t think I need the ‘nanny police state’ to protect me from them.

    I own & run a tax preparation business, and I’m a retired lawyer. I offer RALs only to ensure that I can compete with the large tax chains in terms of services. I don’t add ANY local fees to the loan (the company allows the tax preparer to charge up to $40), and actively discourage folks from applying for such loans. In fact, to date, I’ve only had one client insist on the loan this year.

    Sadly, there are hundreds of folks just down the street paying more money, needlessly, for these loans and for inflated tax preparation fees ($191 on average last year for J-H, $165 for H&R). My average fee is about $84.

    Some people seem to gravitate to the rip off artists out there and aren’t interested in comparison shopping.

  11. Anonymous says:

    I have an independent Income Tax Service. I offer RAL’s to be able to compete with the “chains”. I encourage taxpayers to e-file and use direct deposit to avoid the RAL fees. For the most part my new clients that come from the “chain firms” are not even aware they can e-file to their own account. Sounds to me like the “chains” are not informing clients that this is available. I find that rather interesting!

  12. Mark says:

    Obviously, this type of loan is ridiculous as you say, but then you say the correct approach is to fils immediately. Well, there is let them eat cake again. Sometimes you absolutely need it NOW and it might make some sense to review the various services to find out if they are all the same in terms of the ripp off magnitude

  13. Jullian says:

    I work for H&R block and I have read all of your complaints. What I would like to say is that “WE” at H&R Block hate doing RAL’s (Refund Anticipation Loans”. It takes us an extended amount of time filling out the extra paperwork and typing paperless signatures and passwords.

    Tax preparers would much rather do the “Direct Deposit”, which is considerably quicker and positively cheaper.

    But we don’t have to worry about it anymore, because RAL’s are gone as of this year 2010 tax year.

  14. Billy says:

    They should teach this in high school. I really appreciate this piece of should be common sense.


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