The Morning Call – Avoid tax refund anticipation loans.
It’s tax time, and the goal of most Americans is to collect any refund we’re due from Uncle Sam as quickly as we can.
But don’t be so impatient that you take out a refund anticipation loan. This year more than ever, they’re a colossal waste of your money.
Regulatory changes have limited the availability of the loans, increased the rates and decreased loan amounts. So you’ll potentially pay more to get less.
Refund anticipation loans are just what they sound like. You visit a tax preparer to do your taxes, and the preparer has a bank lined up that will fork over your projected refund, sometimes the same day, so you don’t have to wait for the government to process it.
You pay off the loan through your refund when it arrives, at sky-high interest rates. The Center for Responsible Lending says the rates equate to annual percentage rates of between 50 percent and 500 percent.
The cost rose this tax season because the Internal Revenue Service, which has been under pressure from consumer groups to do something about refund anticipation loans, made a policy change that makes the loans riskier.
Under the new policy, the IRS no longer tells tax preparers and their banks whether a person’s refund is subject to garnishment by the government for debts, such as unpaid taxes, child support or student loans.
The information was used to underwrite refund anticipation loans. Without it, the preparer’s bank must be cautious about offering loans that may not be covered by a refund if it’s intercepted by the government.
“As we prepare for tax season every year, we look at past practices and consider whether they still make sense,” IRS Commissioner Doug Shulman said in a statement in August, when the decision was announced.
His statement stopped short of saying the policy change was an attempt to stop refund anticipation loans, but it hinted at concerns over them.
“Refund anticipation loans are often targeted at lower-income taxpayers,” Shulman said. “With e-file and direct deposit, these taxpayers now have other ways to quickly access their cash.”
The change has put one major tax preparer out of the refund anticipation loan business. H&R Block no longer is offering them because its banker, HSBC, was prohibited from offering the loans by its federal regulator, the Office of the Comptroller of the Currency.