Archives For Consumer Debt

Refund Anticipation Loans

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:


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

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?

Front page in today’s WSJ was an article about how Bank of America is planning to start charging their customers $5 per month when they use their debit cards. Other banks are testing such fees.

Why the new fee?

According to the article, the fee is in response to a part in the Dodd-Frank Financial Reform Bill that will limit the amount banks can charge businesses for transactions (“swipe fees”). Those fees have been capped at $.24 per transaction. They are currently $.44 per transaction. This change will supposedly cost banks $6 billion per year in lost revenue.

What’s funny (maybe funny is the wrong word) is this quote from Dick Durbin:

Sen. Dick Durbin (D-Ill.), who championed the legislative provision that led to the caps, said in a prepared statement: “After years of raking in excess profits off an unfair and anticompetitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It’s overt, unfair, and I hope their customers have the final say.”

Come on, Dick! Do you honestly think banks will just accept $6 billion in lost revenue? HARDLY! This is simply another case of how government involvement leads to unpleasant consequences (I was going to say “unplanned consequences” but I can’t see how new customer fees could be an unplanned consequence of new regulations).

This is a relatively small issue for me but one of the retailers I visit, Spec’s Liquor, has a two-tiered system for charging customers. Customers who pay with cash or debit card, receive a discount. Those who pay with credit card, do not. So, I’ll either have to pay with debit and incur a banking fee, pay with cash (I seldom carry cash), or use my credit card and forgo the discount.

I am happy to report that Christopher Dodd, Barney Frank, and Dick Durbin will be happy to reimburse you for your fees. Just send them the bill. (Unfortunately, that was a joke.)

What a tough job…

Debt Collectors Ask to Be Paid a Little Respect

Meet Mr. Shah…

March 11, 2011

I wanted to highlight this story that was included in the article I mentioned in my previous post.

Morari Shah, a 59-year-old Miami entrepreneur and real-estate investor, is among those taking a radical approach to reducing debts.

Since late 2008, he and his wife have slashed their total debt from nearly $1 million to zero by walking away from the mortgages on four rental properties and paying off two others, all of which lost about half their value in the housing bust. He’s no longer taking up to $4,000 from his monthly income to pay mortgage interest that the rental income didn’t cover.

Instead, he and his wife are fulfilling their goal of building a new $350,000, four-bedroom home in the Dallas suburb of Lewisville, where they plan to retire. “It’s a big relief,” said Mr. Shah. “We went through some rough times, but now I’m comfortable and don’t have to worry about my retirement.”

That’s so nice. I’m so happy for Mr. Shah.

Seriously, Mr. Shah is (or was) an entrepreneur and real-estate investor. It doesn’t seem like he would have been taken advantage of by unscrupulous banks and mortgage brokers.

That’s why I’m not a fan of this walking away business. If things were so bad that he couldn’t afford his properties, then he should have had to file for bankruptcy and lost everything and had to start over. He shouldn’t have been allowed to simply walk away and then move to Texas to build a brand new $350,000 house.

I know some of you will disagree but this stuff drives me nuts.

Interesting piece I found on Investopedia this morning: 9 Reasons to Say “No” to Credit.

Their nine reasons:

1. Financing your purchases doesn’t teach self control.

2. Financing your purchases means you aren’t sticking to your budget.

3. Credit card interest rates are expensive.

4. Credit card interest rates increase when you can’t pay off your balance in full.

5. A poor credit score can affect your insurance rates, being accepted for a job or the ability to finance meaningful purchases like a home.

6. Poor financial habits can jeopardize your relationships.

7. Financing purchases can lead to higher spending.

8. In a worst-case scenario, the habit of financing your purchases can lead to bankruptcy.

9. Avoiding financing can bring peace of mind.

I agree with all of the above. BUT…

A smart person can use credit to their advantage. If you have the option to pay cash or get 0% financing, check to see if you can get a discount for paying cash. If not, take the 0% offer. Then, put the cash in an interest-bearing account and set up automatic payments to pay off the purchase within the interest-free period. Sure, interest rates aren’t good right now but you will earn a little something.

Although mismanaging credit can hurt your credit score, managing credit properly (rather than not using it at all) can help it.

I’m working my way through Meir Statman’s interesting book, What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions. In chapter three of the book, the author makes the following statement:

Beauty matters in life and loans alike. Beautiful applicants are more likely to get loans and pay lower interest rates than less attractive applicants with the same financial information. Moreover, loans to beautiful loan applicants are bad investments because beautiful borrowers are much less likely to repay their loans than less attractive borrowers. Lenders to beautiful borrowers give up the utilitarian benefits of high interest rates and high likelihoods of being paid because they are fooled by the positive sentiment exuded by beautiful applicants. Or perhaps they are not fooled at all. Perhaps they willingly give up the utilitarian benefits of high interest rates and steady loan repayments for the expressive and emotional benefits of associating themselves with beautiful people.

The author references this paper, which you can download (I have not read the paper).

I thought the paragraph was interesting. Perhaps beautiful people get the benefit of the doubt because they appear to take care of themselves. It’s really no different that the advice we normally hear about dressing your best for a job interview. Employers typically don’t want to hire an “ugly” person even if their credentials are outstanding. Maybe this same thought process carries over into other parts of life. Maybe less-attractive people would do better to do business with where face-to-face contact is not necessary.

This afternoon I received a very interesting and timely book, The Road Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems*, by Joan Feeney and Theodore Connolly. This book is a great resource for anyone dealing with debt. Chapter 2 offers up 20 Keys to Successful Negotiating with Creditors along with a few thoughts:

1. Get Prepared: The More You Know, the Better – Develop a budget so that you know what you can afford to pay back. Familiarize yourself with the Fair Debt Collection Practices Act (PDF). Understand your loan terms. Get all your bills organized and take good notes.

2. Be on Guard When Dealing with Creditors – Credit companies have one goal: to get your money.

3. Remember That No Two Creditors Are the Same – What works for one creditor won’t work for another.

4. Communicate – This is no time to stick your head in the sand. Don’t avoid the calls.

5. Make Collectors Stop Calling and Writing – The book has sample letters that can be used to get creditors to stop calling. If they don’t, you can contact your state’s attorney general and report them.

6. Make Offers to Your Creditors – Make a reasonable offer to your creditors and see if they accept. If they think you are serious, they will be more willing to work with you.

7. Remain in Control – Remember that you have something that your creditors want: your money. This puts you in control.

8. Be Patient and Persistent – Be patient. If you get nowhere, call back and speak to someone else. If that doesn’t work, talk to a supervisor. Be patient.

9. Have No Fear – Don’t let creditors scare you. I’m sure that some of them will say some pretty scary things. Remember you’re in charge.

10. Threaten to File for Bankruptcy – Creditors hate the idea of you filing for bankruptcy. The authors recommend saying the following to a supervisor: “Without a sharp reduction in my rate so I can afford to pay, I will have to consider bankruptcy.”

11. Call Once, Then Use Certified Mail – After an initial call, it’s best to use certified mail. Certified mail gives you signatures and receipts for your records.

12. Get It in Writing – If a creditor offers you something, get it in writing before you pay anything. Without it being in writing, creditors may “forget.”

13. Only Agree to Terms You Can Afford – Why would you do anything else?

14. Never Agree to Pay a Debt You Don’t Owe – Makes sense to me.

15. Use Time to Your Advantage – The longer you stretch out negotiation, the better it is for you. Debts expire after the they reach the statute of limitations. Creditors are aware of this and are more willing to negotiate the closer you get to the statute of limitations.

16. Uncover your Creditor’s Bottom Line – Chances are good that your debt was sold to a debt collection company. The authors say that debt collectors pay $.02 to $.08 for each dollar of debt. That means if you had a $1,000 debt, the debt collector paid $20 to $80. Understanding this gives you power to negotiate. The authors say that debt collectors might be willing to settle for 50% to 70% of the original debt.

17. Don’t Let Legal Jargon Trip You Up – If the creditors use terms you don’t understand, ask them to explain. Do not let the jargon scare you. Remember, take notes. Use Google and research what you don’t understand.

18. Be Honest in Your Dealings – Don’t lie. You lose credibility if you lie.

19. Never Assume Another Person’s Debt – Make sense to me.

20. Use Honey, Not Vinegar – Be nice.

Most of the twenty keys are addressed in depth in the book, which is around 350 pages. This book (from what I can tell as I have not yet had time to read it in its entirety) treats the subject of getting out of debt in great detail.

*Affiliate Link