Jeanette A. Tucker | 3/30/2005 2:06:56 AM
Tax refund anticipation loans allow people to borrow against an expected federal and/or state income tax refund. RALs are extremely high-cost bank loans that last about 10 days and are secured by the taxpayer’s expected tax refund, explains LSU AgCenter family economics professor Dr. Jeanette Tucker.
RALs appeal to people who want cash quickly without a lot of questions or a credit check.
"Like payday loans and pawnshop loans, tax refund anticipation loans are an expensive way to borrow money when the cost is calculated on an annualized basis," Tucker emphasizes. She notes that the average taxpayer who uses a commercial tax preparer typically pays $252 for the RAL. For an average refund of $2,100 the RAL costs about $132 (on top of tax preparation fees averaging $120) and bears an effective annual interest rate of about 180 percent (or $240) if administrative fees are included.
Loan fees range from $30 to $105, and administrative fees range from $28 to $59 (with an average of $32). Many consumers also pay an extra $15 to $30 for "instant" products that give them a loan on the same day.
Research by the National Consumer Law Center found that 55 percent of consumers who obtained RALs in 2002 were low-wage workers who received the Earned Income Tax Credit, even though EITC recipients comprise only 15 percent of taxpayers. Seven million working poor families spent $1.75 billion on RAL fees, commercial tax preparation and (for some of them) check-cashing fees to receive their refund less than two weeks sooner than they could from the IRS.
In 2002, working-poor consumers who qualified for EITC paid about $1.2 billion for commercial tax preparation, electronic filing, RAL fees and other charges to get immediate access to expected refunds. EITC is meant to give a boost to hard-working, low-income Americans. Officials at the National Consumers League state, "Tax preparers and banks are eating away at the value of this program, taking money that could otherwise be used to pay bills or build a nest egg for a home or education."
Check cashers take another bite out of tax refunds, especially for the 45 percent of EITC recipients who pay for check cashing. The cost of cashing a $2,000 IRS check costs $56.60 on average. The average cost for cashing a $2,000 RAL check is even greater – $61.60.
"Taxpayers are more likely to pay check-cashing fees or buy tax refund check products if they don’t have an account to receive direct deposit from the IRS," Tucker points out, adding, "Bank accounts are a major factor in helping limited resource taxpayers avoid RALs."
Some 10 million families do not have bank accounts. Without bank accounts, cash-strapped consumers cannot receive speedy refunds even if they file electronically. The Consumer Federation of America recommends that consumers open a savings account and go to a free tax preparation center to get help preparing and filing tax returns.
Tucker says to access your tax refund money quickly, while avoiding RALs, consider these options:
• Get a smaller refund. Put more money in each paycheck by adjusting tax withholding. See your employer for formW-4.
• Open a bank account to take advantage of direct deposit.
• File your tax return early.
• Have your taxes prepared free at a Volunteer Income Tax Assistance site. VITA provides free tax preparation for low- and moderate-income taxpayers. Vita sites are sponsored by the IRS and can be found in libraries, community centers and other locations during tax time.
• File your return electronically for faster processing.
• File a paper return, but have your refund direct-deposited into your bank account. This too, will speed the processing time and avoid problems with mail delivery. Simply list your bank name and account number on your return.
"You also can simply wait for your return," Tucker says, while warning, "Avoid check cashers."
For information on related family and consumer topics, visit the FCS Web site at www.lsuagcenter.com/Inst/
Extension/Departments/fcs/. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.