Pay day loan shops (and cash checking and other similar short term loan shops) are often singled out as places that prey on consumers in a tight spot. While I don’t dispute that, I want to point out other places that also prey on consumers in a tight spot that don’t often get the spotlight.

Pay Day Loans Are Bad

Don’t get me wrong, pay day loans are horrible products for consumers because of their high fees, high interest rates, and their propensity to become financial sinkholes. It’s the financial version of someone going in for a routine cavity filling and coming out with a lobotomy. You just need a little extra help to get you to the next pay day but end up paying for years. According to this warning by the FTC, they give an example in which “the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times [42 calendar days], the finance charge would climb to $60 to borrow $100.” $15 to start and 391% APR is horrible but let’s compare to some of these other products.

Refund Anticipation Loans

Refund anticipation loans, tax rebate loans, assisted refund loans, etc. are horrible horrible, don’t ever get a refund anticipation loan. These products are often highlighted as preying on consumers but I felt they should be mentioned anyway. Given the fervor over pay day loans, you’d think a loan with a $30 activation fee, $20 check processing fee, and a 36% APR would get a little more heat than it does. $50 to start plus 36% APR on funds that are guaranteed (if the tax preparer does their job right) by the IRS… seems a little rougher than the pay day loans, which are loans on funds that are not guaranteed.

Bank Fees

According to Bankrate’s 2007 bank study, bank fees are on the rise. Big time. A bounced check will cost you $28.23, average ATM surcharge will run you $1.78, and the average monthly service fee on a checking account was $11.72 (don’t ever pay a fee for a checking account). You’d think that they were lending you money given those fee values! I can understand the headache of a bounced check but let’s get real here, bounced checks never come alone. In fact, considering banks withdraw the largest amounts first, you’re more likely to see multiple bounces than a single bounce.

Credit Card Fees

Again, credit card companies have come under heat too but it still bears highlighting that they’re practices are closer to pay day loans than they are to the Fed. If you make your payment late, most places will charge you somewhere between $20 and $30, with the bias towards $30. Interest rates? High, plus companies have been mailing out letters notifying people that their rates have gone up for no reason. I’ll leave it at that since the credit card industry does take a lot of heat for their practices.

So as you can see, pay day loans are horrible but there are a lot of other horrible and more mainstream products out there that simply don’t get the same exposure. Bouncing a check is like missing a payment which is like taking out a pay day loan, in terms of cost, but at least with a pay day loan you get something out of it (a horrible horrible loan!).

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.

(Photo by hullbody)

You would think that most people know that payday loans are ripoffs and the ones you use them are either in dire financial straits or think they’re in dire financial straits but as it turns out, a lot of folks don’t realize refund anticipation loans are ripoffs too because they usually are offered by reputable companies like Jackson Hewitt, H&R Block, and other big tax preparer names and not Fast Cash, Check Cashing R Us, or other seedily named joints. However, if you ever look at the fine print, you’ll see fees and interest rates that would make a check cashing shop blush. And an even scarier tactic nowadays is that a lot of these preparation houses don’t even need a W-2, they’re offering paystub loans and you only need to bring in your December paystub in order to apply for these loans.

When I tried to figure out what those fees and rates were like by searching H&R Block and Jackson Hewitt’s websites, I found nothing (I only expected to be able to find the fees since the rate would be dependent on the amount and your credit worthiness). All I found were offers of instant money loans and instant refund anticipation loans and to make matters even worse, they were even offering to put the whole amount onto a debit card (taking advantage of a little breakage?). But what I did see was that H&R Block was partnered with HSBC Bank USA and Jackson Hewitt was partnered with Pacific Capital Bank, N.A. or HSBC Bank USA (your loan could come from either). HSBC Bank USA is headquartered in Delaware and Pacific Capital Bank is an independent bank in California - Delaware has no cap on usury interest rates and California sports a fat 36% cap. By partnering with banks located in capless or high cap states instead of offering these loans themselves, they can take advantage of charging higher rates. (Incidentally, partnering with banks in capless/high-cap states isn’t something that I think is deceitful or under-handed, all the credit card companies are headquartered in capless or high-cap states)

And if you think folks are diligent enough to read through the fine print to fully understand fees and interest rates to realize it’s a ripoff, they’re not. If you’ve ever installed software, how many times have you actually read the Terms & Conditions? I’ve never read it, heck, I’ve never even scanned it. Unfortunately one scenario that does happen a lot is that of a language barrier, where the tax payer isn’t a native English speaker and when they go to a tax preparer (if I couldn’t read English well, I’d definitely go to a preparer - you don’t want a mistake costing you thousands of dollars), they don’t understand that what they’re getting is in fact a loan and not their refund! It’s like those scumbags who are offering predatory mortgage loans and getting retirees to refinance a fully paid off home into a 3/1 ARM are preying on the simply fact that most people don’t read through or don’t understand the fine print, even if they’re laid out “obviously” on a HUD-1 form!

The bottom line is that you should avoid these paystub or refund anticipation loans like the plague because that’s what they are, one little loan can follow you for years if you’re not careful about paying it off. It’s that way with payday loans too except you can see it coming because you actually have to walk into shady looking places instead of a nicely lit office with a nicely dressed tax preparer.

Image courtesy of Jym Ferrier.

KANSAS CITY, Mo. - H&R Block Inc. (NYSE: HRB) today announced plans to open low-cost bank accounts for free for 1 million of its tax clients and significantly reduce the cost of refund anticipation loans for tax season 2007.

At its annual meeting of shareholders, H&R Block Chairman and CEO Mark A. Ernst outlined a four-part plan that includes a next generation, low-cost bank account; new high-yield savings products; and enhanced financial education to better serve its tax clients.

“H&R Block has a long history of helping American families get the most from their financial lives,” Ernst said. “The steps we’re taking today build on that legacy by helping millions of our clients access the banking system in a unique way to reduce their costs and take another step toward a brighter financial future.”

The company will utilize its nationwide network of 12,500 tax offices to enable clients to open bank and savings accounts conveniently at tax time.

1. New Low-Cost Banking Solution

H&R Block has set a target to open 1 million, next generation bank accounts for free to give clients the benefits of direct deposit of their income tax refund as well as easy bill payment and purchases, and ATM withdrawals without risk of overdraft fees. The new account blends the features of a traditional bank account with the benefits of a pre-paid card
to offer secure, convenient and low-cost services that meet the needs of H&R Block’s clients.

Accessed with the new H&R Block Emerald Pre-paid Card, this next generation bank account will be opened for free and features easy account access, no overdraft fees, no minimum balance requirement, no transaction fees for purchases, FDIC insurance, and convenient monthly statements. In addition, the bank card provides a way to avoid high check-cashing fees for the nearly 3 million H&R Block clients who do not have a bank account. The card account can also accept payroll and other deposits at thousands of
retail locations nationwide.

“With direct deposit of a tax refund into an H&R Block Bank account, clients can receive their refunds in less than half the time of a mailed IRS check,” Ernst said. “And clients can avoid fees for refund loans or check cashing that together can cost $145 or more just at tax time. With year-round use, added savings averaging $460 annually are possible.”

In reaction to H&R Block’s announcement, Ellen Seidman, executive vice president of Shorebank Corp. and former director of the Office of Thrift Supervision said, “Using its understanding of the desire of consumers to combine the safety of an insured bank account with liquidity and pricing transparency, H&R Block Bank will provide consumers who have traditionally not used bank accounts with access to lower-cost solutions at scale.”

2. High-Yield Savings Solutions

In addition to its low-cost banking solution, H&R Block announced two new savings accounts that will enable its clients to turn their tax refunds into savings. At 5.25 percent annual percentage yield (APY), H&R Block’s new Easy Savings Account and Easy IRA offer among the highest rates of return in the country for FDIC-insured deposits.

The Easy Savings Account, designed as a basic emergency fund, offers convenient access at ATMs. The Easy IRA enables clients to save for retirement using a tax-advantaged account that makes it simple to claim the Retirement Saver’s Credit, a federal matching incentive for low- and moderate-income savers.

Both accounts have no minimum balance requirement and no opening or annual account maintenance fees for H&R Block’s retail tax clients. The annual fee is also waived for non-H&R Block clients who maintain a $300 minimum balance.

“For many Americans, the day they file their tax return is the one day of the year that they have managed to accumulate a non-negligible sum of money. As such, it represents a terrific opportunity to generate some long-term savings,” said Dr. Richard H. Thaler, professor of behavioral science and economics at the University of Chicago Graduate School of Business. “What H&R Block has done is create a structure in which taxpayers can take advantage of that opportunity. By allowing them to open an account and directly deposit a portion of their tax refund, reluctant savers are much more likely to act. This creates a potentially powerful tool to help solve one of the most important problems facing our country.”

3. Reducing the Cost of Refund Lending

H&R Block, in cooperation with its partner HSBC Taxpayer Financial Services, will significantly reduce the cost of refund lending for the upcoming tax season.

For a $2,800 refund anticipation loan, which is the average loan size for H&R Block, the cost could be reduced more than 40 percent compared to last year. This same $2,800 refund loan can cost as little as $60, including a finance charge of less than 1.1 percent, when the loan is combined with a bank account. As an 11-day loan, the finance charge on this $2,800 loan translates to a 36 percent APR, which meets benchmarks suggested by many consumer advocates.

“Used in combination with an H&R Block Bank account, lower-cost loans can be a bridge to entering the financial mainstream,” Ernst said. “I’m hopeful that our action will trigger price cuts and reforms throughout the RAL industry.”

Today’s action builds on past H&R Block efforts to improve refund lending. Over the last several years, the company has reduced refund lending fees, improved client disclosures and tax professional training, incorporated suggestions from consumer advocates, and supported stronger RAL regulation to ensure that consumers can make more informed choices.

“Today’s announcement represents a dramatic and profound step forward in the tax preparation business for low and moderate income Americans,” said Steven Dow, executive director of Community Action Project of Tulsa County, one of the nation’s largest providers of free services for low-income taxpayers. “H&R Block’s decision to promote savings and simultaneously reduce the cost of banking services and the cost of loans is a monumental and welcome shift in the operating philosophy of the commercial tax preparation business.”

4. Improving Financial Education and Advice

To expand its financial education and advice programs, the company will upgrade its H&R Block Advantage Report, a free report that customizes tax tips, budgeting, borrowing and savings information, alerts to government benefits, and action plans for each tax client.

“Many middle-income Americans have been left behind as traditional financial institutions focus on those with higher incomes,” Ernst said. “Tax time is a unique moment during which we can meet our clients’ distinct needs with planning and advice that’s simple and
actionable.”

Steven Brobeck, executive director of the Consumer Federation of America, acknowledged H&R Block’s efforts, saying, “The Consumer Federation of America supports any of H&R Block’s efforts that benefit lower-income households by lowering the cost of essential banking services, by providing new and effective savings opportunities, and by informing
clients how to lower banking costs and build personal wealth.”

The company said it plans to introduce additional financial advice and education tools for the 2007 tax season.

About H&R Block

H&R Block Inc. (NYSE: HRB) is a leading provider of tax, financial, mortgage, accounting and business consulting services and products. H&R Block is the world’s largest tax services provider, having prepared more than 400 million tax returns since 1955. The company and its subsidiaries generated revenues of $4.9 billion and net income of $490 million in fiscal year 2006. The company operates in four principal business segments: Tax Services (income tax preparation and advice via in-office, online and software solutions); Mortgage Services (non-prime mortgage originations and loan servicing); Business Services (tax, accounting and consulting services for midsized businesses); and Consumer Financial Services (investment and
financial advisory services, retail mortgage loans and banking products). Headquartered in Kansas City, Mo., H&R Block markets its services and products under three leading brands - H&R Block, Option One and RSM McGladrey.

This is not a paid advertisement, BFP took no compensation of any kind for publishing this press release.