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Beware Refund-Anticipation Loans
There are other ways to get cash fast without the high interest rates and fees.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
January 26, 2010
What do you think of refund-anticipation loans?
I don’t like them. These loans quickly provide money equal to your tax refund, but they generally charge high interest rates and fees. A study by the Consumer Federation of America and the National Consumer Law Center found that taxpayers paid about $800 million in loan fees and other fees for refund-anticipation loans in 2008.
Some firms have lowered their rates for refund-anticipation loans over the past year, but they can still be quite high. In general, the effective annual percentage rate for refund-anticipation loans can range from about 50% (for a $10,000 loan) up to nearly 500% (for a $300 loan), when you include interest charges and refund account fees, according to the study.
But you can get your refund almost as quickly without any fees or interest charges. If you e-file your taxes with the IRS and have your money deposited directly into your bank account, you can generally get your refund in fewer than ten days. There’s no fee for e-filing, and you don’t have to pay any interest. The IRS began accepting e-filed tax returns for 2009 on January 15. See our Tax Tip about e-filing for more information and for sites that can help you do your taxes for free.
No matter how you file your tax return, you will need to wait until you have your W-2 and 1099 forms and other documents from your employer, bank, brokerage firm, mortgage company and others so you’ll know how much you must report and can deduct when you file. But you should receive those documents by the end of January.
If you’re tight on cash and can’t wait for your refund, consider these 11 Ways to Get Extra Cash.
And wouldn’t you rather have more money in each paycheck instead of having to wait for a refund next year? If you got a big refund in 2009, use our tax withholding calculator to see whether you can adjust your tax withholding and boost your take-home pay for 2010.
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Reader Comments (3)
Posted by: Hawkston at 01/26/2010 09:26:26 AM
Actually, the guidelines set forth by the IRS on Direct Deposit refunds from e-filing are 8 to 15 days, To state that someone can expect to receive their refund faster than stated by the guidelines "in general" is disingenious. There are many factors that determine how long a refund will take to process, including but not limited to, when the return is processed. Early filers may see refunds closer to 8 days with efile and Direct Deposit is there are no mistakes or issues with their filing. Later filers might see refunds closer to the 15 days with e-file and Direct Deposit, again depending on the complexity and accuracy of their filed return. Additionally, some rates that are charged on a Refund Anticipation Loan are high if you were to have that loan held for a full year, but a majority of these loans are for less than 1 month. I've been seeing finance charges on refunds of $3K to $4K for about $24.00 to $32.00. If the taxpayer's refund is actually less than the amount filed for, there will be an outstanding loan balance that will be at a high rate, which should be rectified and paid off immediately. In the future, please research your subject matter by actually sitting with a company that does the Refund Anticiaption Loans (more than one would be beneficial) and find out exactly what the process, fees and benefits are. You would have also found that this year, Refund Anticipation Loans are very hard to qualify for and many tax preparation services are unable to offer loans doe the full refund amount, if at all.
Posted by: clydewolf at 01/26/2010 01:48:25 PM
Most of the refund anticipation loans are made by taxpayers that do not have sufficient funds to pay for the tax return preparation. The tax prep bill is deducted from the tax refund, and is paid to the preparer before the taxpayer's loan is handed over to the taxpayer. Thanks to Congress for passing such complicated tax laws that many taxpayers do not understand. Many years ago Kiplingers gave a taxpayer scienario to several CPAs across the country. To no one's surprise, there were several different answers from these CPAs. I would like to see that again.
Posted by: Tom at 01/26/2010 03:22:28 PM
I agree that it is probably disingenuous to state that you could get your refund faster than 8 days. However, paying "$24.00 to $32.00" over the course of 8-15 days (even on $4k borrowed) is quite ludicrous. Go charge whatever you needed to spend that $1000 on with your credit card, who will at least give you one billing cycle interest free. Of course, the assumption is you're financially disciplined enough to pay off what you charged, which may not be the case. If you're so hard up for money that you feel compelled to take a loan with an APR of 30%+, then the real issue at hand is what is wrong with your current lifestyle when you consider your budget.