Tax Refund Loans: Beware of the Numbers

“Exorbitant,” say most experts. Don’t fall for the promise of quick cash through these tax refund anticipation loans (RALs). The interest rates on these very short-term loans are extremely high, typically in the triple to quadruple digits, with the average interest rate on the average loan of $2,000 being 222.5%. In addition to interest, you will also pay a loan fee between $29 and $120.

The National Consumer Law Center reports that in 2004 (the latest year for which data was available), over 12 million taxpayers spent $1.6 billion to get their refund faster by two weeks or less by taking out a tax refund loan. For that year alone, 1 in 10 tax returns involved a tax refund loan. If you look only at low-income working families claiming the Earned Income Tax Credit, the numbers jump to 1 out of every 3 tax returns.

While it may be tempting to get to your refund money early, there are better alternatives. For example, why not adjust your withholding so that less tax is taken from your paycheck? If you find that you’d spend the money as fast as you’d get it, why not set up a savings account and have your bank automatically transfer a set amount each paycheck?

Most taxpayers (about 70%) can take advantage of the IRS’ Free File program, which is a quicker way to both file your return AND get your refund. And it’s free! It would take about 28 days from the time you file online to get your refund. If you authorize direct deposit of the refund into your bank account, the time is even shorter – two weeks or less. If your adjusted gross income is $52,000 or less, you may qualify for this free service. Unfortunately, the IRS allows tax refund loan ads on the site, so resist the temptation to “get rich click.”

So unless you are truly desperate (the house-in-foreclosure kind of desperate), don’t fall for these high interest quick money loans.

Learn more about federal income taxes and the law at FreeAdvice.com. To find a tax attorney, go to AttorneyPages.com.

To learn more about taxes and the IRS, see the following articles:

The Free Advice Guide for Filing Your 2008 Tax Return
Filing Your 2008 Tax Return: Bring on the Paperwork
When You Have to File Your Tax Return Late
When You Need to Pay Your Income Tax Late
Do I Have to File if I Live Outside the U.S.?