Why “PayDay” Loans from Uncle Sam Just Aren’t Worth It
Many of you may remember my recent admission to being a former payday loan junkie. It wasn’t pretty, and I am proud to say I have not relapsed since that period in my financial history. There’s a new way to give out large chunks of your hard-earned money, and it’s being offered by tax preparers all over the country.
It’s tax time. For many of us, a sizeable refund may be making its way into our lives, and it can’t come too soon. The ads for “fast money options” are overwhelming. So are the fees associated with these services.
Refund anticipation loans (RAL’s) are a loan based on the amount that the tax preparer has figured you will be getting in the form of a refund. This amount is then “loaned” to you quicker than you would have been able to get it on your own from the government. By looking at the pricing guide at H&R Block’s own website, you can see that you could be paying a large percentage of your refund to the tax preparer, only to receive your refund at almost the same time as you would from the government. Here’s a breakdown of what reputable tax corporations are charging you to get your own money a little bit faster:
Want your money today? If approved for the Instant Refund Anticipation Loan (IRAL), you can get your $200 tax refund check today for only $77.23! (This includes a $20 check processing fee, and a $27.28 finance charge at 481% APR.) Oh, did I forget to mention that you will also have to pay a $29.95 Refund Account Fee?
If you’re credit isn’t so great, however, you won’t be able to walk out the door with check (or loaded debit card) in hand. You will only be eligible for the regular Refund Anticipation Loan (RAL), and will have to pay the same $29.95 Refund Account Fee, plus $52.09 in finance charges and fees. You’ll get your money in about 8-15 business days. (This is the same number of days that H&R Block claims the government would have given you your money anyway. They also make NO claims that this timeframe is guaranteed by getting a RAL.)
So what is the benefit of getting a IRAL, much less the regular RAL? Apparently, no upfront filing fees. H&R Block will kindly deduct the cost of their preparation service from your refund. Otherwise, if you decide to wait it out the extra 1-15 days like the rest of us, you will have to pay them before filing.
This would seem like a great savings, except that 97 million Americans are eligible to do their taxes themselves, for free, via the IRS free-file website. (You may also be eligible if your AGI was less than $54,000.)
It might be easy to say that you need your money today, and that the IRAL is the only way to get money when you need it. Think carefully about this decision, however, before you jump in. What are you using the money for? This Arizona Republic article states that 24 percent of Americans use their refund for big-ticket items that I wouldn’t consider a necessity (including big-screen TV’s, cruises, or vacations.) Is there really a need then to rush your refund, especially when it’s costing so much?
If you find yourself in a pickle and need an immediate low-interest source of money, this might be a good time to look at your credit card offers. Many cards are looking to gain additional business by introducing new rates to existing customers. The 1.99% special promo pricing will seem tiny compared to the whopping finance charges of the IRAL’s. (Just make a promise that you will pay off that card as soon as your refund check comes in.)
The bottom line is this: Tax refunds are YOUR money. If the government can’t keep it from you, then either should tax preparation services. I’m sure there are much more important things you can spend your refund on, if you’re willing to wait just a bit.
(Note: The information contained in this article refers to H&R Block. Many other corporate small tax services offer similar programs. This article is in no way a discredit to their tax preparation services.)