The high cost of tax refund loans

It’s tax time and that means payday for many American workers expecting a tax refund. After a tough economic year, many cash-strapped taxpayers may be feeling a bit desperate and don’t want to wait longer than necessary to get their money. Unfortunately, this could drive consumers struggling to make ends meet to seek a refund anticipation loan.

Basically, a refund anticipation loan is a short-term cash advance that uses your expected tax refund as collateral. The loans allow you get your money a little bit earlier, but at a hefty price. According to consumer advocates, refund anticipation loans fees translate into high Annual Percentage Rates (APRs) of 50% to 500%.

Low- to moderate-income taxpayers are usually the target of tax refund anticipation loans. These consumers end up paying a total of more than $900 million in fees for their easy money. Although the IRS does not take an official stand on refund anticipation loans, it also does not endorse the practice. Unless someone is facing a true financial emergency, the fees are just not worth the convenience. Instead, taxpayers should consider taking steps to ensure they receive the maximum amount owed to them:

  • Double-check your work. According to the IRS, even a small mistake can cause problems with your tax return, which might lead to delays in processing your return and receiving your refund.
  • Use Free File. A new service offered by the IRS, which enables low and middle income taxpayers to file electronically for free and have their refund deposited directly in their checking or savings accounts in about 10 business days.
  • Take tax credits. The IRS announced several new benefits this year like the Recovery Rebate Credit and the First-Time Homebuyer Credit – offering a tax credit up to $7,500. Visit IRS.gov to learn more about other tax credits and benefits.
  • Remember your charitable donations. The IRS might just be the only group that will give you extra credit just for being nice. The value of all donated items including clothes, furniture, and cash is deductible. Proof of the donation is required.

Finally, if you are anticipating a tax refund for more than $500, consider reducing the withholding on your W-4. Calculators at IRS.gov can help you figure your appropriate amount. More money on your paycheck will help during this time of economic recovery.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.