Avoid Tax Refund Anticipation Loans

Let’s start with the bottom line here:    Don’t take out a loan or advance on the tax refund that you are expecting.   Period.  End of story.   If you want your money quickly, just file electronically and tell the IRS to direct deposit your refund to your bank account.  If you made $56,000 or less in 2008, you may qualify to file your federal taxes for free.  If you do direct deposit, and there aren’t any issues, you’ll have your refund in two weeks or less— it may take another week or so if the IRS mails your check.   After you file, you can check the status of your refund online.

So, if you take out a refund anticipation loan, you are borrowing against money you’ll see within about one to three weeks.   For that privilege, you’ll pay a very high cost.  We won’t go into the math here, because fees and rates vary wildly across preparers, but the effective APR (all the costs of the loan annualized for a full year) is often north of 100%. It may not seem like the cost is that high, because you only are actually borrowing for a couple weeks, but maybe this example will help:

Let’s say you get a $1,000 loan for two weeks and it costs you $50 in fees and interest.    If you were to put that money in a bank account earning 2% interest (a pretty good rate right now), you would earn about 77 cents.   So, basically, someone is charging you $50 for money that is costing them less than $1.00.

About 8.7 million people took out these loans in 2007.  Don’t be one of them in 2009.   For more information, check out the Consumer Federation of America & National Consumer Law Center.