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Refund Anticipation Loans

By JLP | January 30, 2012

The Statue of Liberty - best tax preparation mascot ever?

Every day on the way home, we pass the Liberty Tax Statue of Liberty waving at us. I never have quite figured out why the Statue of Liberty wants me to do my taxes, but I get the idea that they want me to come in and find out.

The last time we passed them, though, I saw this sign:

REFUND ANTICIPATION LOANS

This sounds like bad idea on so many levels. I tried very hard to think of a situation in which this could be considered a good idea.  I even called our local Liberty Tax branch to get some details about the offer.

In order to represent them fairly, I want to make it clear that I do not think this is an evil company, nor do I think they are in any way running a scam or anything improper. But I do believe that they wouldn’t loan money to people if they weren’t making a profit from it, and I definitely do not think this is in the best interest of their customers.

When I spoke with the representative at Liberty Tax, I asked her what the terms of the loan are. She informed me that they don’t directly offer the loan or qualify people for it – it’s done through Republic Bank & Trust.  That means the terms will vary depending on the specific circumstances of the customer. I have to believe that people who are trying to qualify for this type of loan don’t have the best credit scores, so I’m sure the interest rates are high. (Based on some of the research I’ve done, it’s possible to see rates up to 500%!) Every person who qualifies can receive a loan of up to $1,500, and the amount is paid back when their tax return refund comes in.

The only positive note I could find in the whole thing is that you can’t qualify until after your taxes are calculated.  At least theoretically, the customer would know how much their refund will be before they decide whether to apply for a loan.

I specifically asked the representative if they recommended these types of loans. She didn’t really answer that question, but simply said she would do what the customer wanted.

Debt is bad. Debt based on the anticipation of having a lot of money come in “soon” is really bad. It’s so tempting, though, to take the easy way out.

Here’s two reasons this is a bad idea:

You’re choosing to have a small amount of money right now instead of a larger amount of money later.

We’re a society that wants instant gratification. We don’t want to wait for anything. Some of it is because we’re greedy: We want our money – and the stuff we can buy with our money – RIGHT NOW. Some of it is because we’re scared: Maybe we are afraid there’s a bill we can’t pay, and this seems like the best – or easiest – way to pay it. But if you wait, you can do more with your money later than you’ll be able to do with it right now.  In order to receive this type of loan, here are some examples of the fees and charges you’ll be expected to pay (rough numbers):

Tax preparation fee: Around $200 (according to About.com)

eFiling fee: Usually around $25 (according to TuboTax)

Loan origination fee: Usually around $32 (according to Wikipedia)

Interest (assuming a rate of 20%): $50 (20% is a very generous estimate according to CRL)

So you’re spending $307 to receive your money a couple of weeks early. Is it worth it?

Let me say that again: it’s YOUR MONEY, but you’re paying someone else to give it to you. That does not make sense on any level.

 

When you go into debt, though, you are giving away control of your finances and part of your life.

When you borrow the money initially, it is subject to someone else’s terms – they decide how much money they will give you, when they will give it to you, how much interest you have to pay back. When your refund finally does come in, it’s not yours to do with what you want. You have to give it back to the people you borrowed it from in the first place. Even the Bible tells us, “The borrower is slave to the lender.”

Here’s an important “grown up financial lesson” to learn: Even when it feels harder in some ways, being in control of your own life and finances brings more freedom and security than handing it over to someone else.

So what would you say to someone who was considering getting one of these loans? Is there anything you could say that would change the mind of someone who had already decided to get one of these loans?

Topics: Consumer Debt, Taxes | 8 Comments »


8 Responses to “Refund Anticipation Loans”

  1. BG Says:
    January 30th, 2012 at 12:20 pm

    H&R Block used to do the same thing (but not this year). This “scam” is no different than payday loans.

  2. Adam Says:
    January 30th, 2012 at 1:53 pm

    H&R Block stopped these loans last year not available for filing 2010 taxes). In 2011 (the 2010 filing year) the IRS stopped providing a debt indicator to tax preparers. The debt indicator would inform the tax preparer whether or not a client owed the IRS back taxes, back child support, or had delinquent student loans. This indicator was used as a credit check to approve the RAL’s (Refund Anticipation Loans).

    Without a debt indicator H&R Block was unable to find a partner bank willing to make loans without the debt indicator. Liberty Tax uses several banks depending on where the offices are located.

    While working for H&R while they were offering RAL’s, I found that the average client taking a RAL had the following characteristics:

    Refund: $5,000 (EIC mostly)
    Prep Fee: $300
    RAL Application Fee: $25
    Interest if approved: $100 (50%APR for 2 Weeks)
    Total Fees: $425
    Interest Rate Disclosed to Client: 221%

    These numbers are estimates based on memory and the interest seems low. H&R Block also offered an IRAL (Instant RAL) in which the client had cash available when they left the office with interest rates 4 times higher. The RAL funds were available the next day. I had a lot of clients come in and request an IRAL at 8pm because they wanted their money now and couldn’t wait until 7am the next day.

    The interest rate we disclosed had to include all fees in it. It seemed that the smaller a refund you were receiving the higher the interest rate was – there seemed to be a target interest amount for our partner bank.

    Working at Block, I violated Block’s policy regarding RAL’s and IRAL’s by trying to steer clients away from these because of the fees. Block’s policy (and it sounds like the same for Liberty Tax) was that the choice was solely up to the client and the preparer couldn’t try to influence the clients decision. As a Block employee I was paid by commission for the return only (Prep Fee), there was no benefit to the preparer for selling IRAL’s or RAL’s.

    In general, the clientele that applied for RAL’s were all low income individuals with two or three children and were qualified for the maximum amount of earned income credit (EIC). They viewed the money as being free and didn’t care how much they spent to get it since it was free money they didn’t have before.

  3. Lindsay Says:
    January 30th, 2012 at 4:53 pm

    When you would give people advice, would it change their minds about getting the loan? I wonder if it’s possible to educate people more fully about these loans or if there will always be people who insist on making these kinds of dumb decisions.

  4. BG Says:
    January 30th, 2012 at 5:15 pm

    Best way to combat this scam is for the IRS to release the money within hours (minutes) of the return being e-filed — then there would be no market for these ‘predator’ lenders.

    What, exactly, is the IRS doing in between the time it confirms the filing (confirming it is free of mathematical errors), and the time it actually makes the e-deposit into your account?

    I don’t know what the average turnaround time is, but I think it is currently around 6-8 weeks.

  5. Jack Says:
    January 30th, 2012 at 5:59 pm

    An even better way to combat this scam is to replace the income tax with a sales tax.

  6. Todd Hickman Says:
    January 30th, 2012 at 6:04 pm

    JLP, really appreciate the article. We were discussing this today. Our offices do a professionally completed 1040 by an Enrolled Agent for $79 for individuals age 50+. We do not do RALs because we too feel they are a rip off.

  7. Todd Hickman Says:
    January 30th, 2012 at 6:05 pm

    Electronic filing included, in case anyone is wondering.

  8. Adam Says:
    February 2nd, 2012 at 10:01 am

    Response to comment 3:

    Lindsay,
    Most of the time the clients would ignore my advice to not take the RAL or IRAL. Many of the clients asking for these loans would request them regardless. They would complain about the fees and interest and when I offered them a Refund Anticipation Check (RAC) instead, they would decline because they couldn’t wait the 7 to 14 days.

    In most cases I don’t believe improved financial literacy would have changed their decisions. The issue was more the clients feeling that they were receiving “free” money that they otherwise wouldn’t have gotten.

    To All:
    In most cases clients applying for RAL’s or IRAL’s would be denied (do to poor credit) and would end up with a RAC instead.

    The RAC gets you your refund in 7 to 14 days (the standard time for electronic filing) but alows you to pay for your preparation fees out of your refund. The RAL and IRAL also allowed this. The fee for the RAC was/is $35. If a client applied for a RAL / IRAL and was denied they were automatically given a RAC. The client only paid for whichever product they received. If the client was denied for the loan, they only paid the $35 RAC fee instead of the RAL application fee and interest.

    My interpretation of how a RAC works:
    The IRS can only deposit funds into an account with the clients name on it. With a RAC, H&R Block opens a joint checking account in the clients name and H&R Blocks name. The IRS deposits the refund into this account and H&R Block removes their fees and closes the account, passing the remaining funds onto the client.

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