Why “PayDay” Loans from Uncle Sam Just Aren’t Worth It

by Linsey Knerl on 16 January 2008 9 comments
Photo: Nic McPhee

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.)

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Guest's picture
Blaise Pascal

The IRS offers a program of voluntary income tax preparers for low-income households. It used to be called VITA, but I think the name might have changed. I've volunteered with the program for 2 of the last 3 years, and I'm volunteering again this year.

I also worked for H&R Block for one year, and it made me very sad. Most of the people I saw would have qualified for the VITA program, yet payed outrageous amounts of money for services they could have gotten for free.

The VITA site I work with is hosted by one of the local Credit Unions. One of the neat things about that is that they can, and do, offer advanced refund loans just like H&R Block, but at APRs equivalent to a collateralized loan from the CU (i.e., 10-15% or so, for 2 weeks; not much). Not all VITA sites offer such a service, but if you can find one, it can be a much better loan than you'd get at a commercial tax preparer.

You can find more info about the VITA program at http://www.irs.gov/individuals/article/0,,id=107626,00.html

Linsey Knerl's picture

Thank you! I am always amazed at the information that isn't more well-known. I would hope taxpayers would take a moment to get as much info as they can on tax-helps BEFORE they find themselves in a position where spending too much is a necessity.

I appreciate resources like these, and was especially impressed with the help for the elderly listed on that webpage. Good work!

 

Linsey Knerl

Guest's picture
Kathryn

Also, even if you don't qualify for free federal e-file, your state might offer free e-filing with fewer or no restrictions. Here's a list:

http://www.mymoneyblog.com/archives/2007/01/free-online-tax-e-filing-opt...

Myscha Theriault's picture

Good piece, Linsey. And timely!

Guest's picture

...in the days of electronic filing. The last two years, I got both my refunds within two weeks of filing!

As I mentioned on another blog...why don't more high schools have required personal finance and life lessons classes? Most people get in the rut they are in now because they never learned any different...and the cycle will continue with their kids...

Guest's picture
Guest

My wife works at H&R Block doing tax preparation. She hates the IRAL and RAL products. She tries her best to talk people out of them, but so many people want their money +now+ and won't listen to reason. I'm sure some people really can't wait 2 weeks to have their refund direct deposited, but most probably can.

My wife also complains about the number of people who try to lie and cheat to get bigger refunds. She tells them to go away, but they just end up going to another branch (or another service) once they figure out what to say. But that's another story....

Guest's picture
Lucille

We did the instant refund the first year H&R did it. We paid a flat $50 for doing our return and getting us the check in 24 hrs. They obviously found a way to make MUCH more money off of it.

The following year we went to H&R to get our taxes done. They guy knew less about what he was doing than we did. So now we either do them on paper if it is an easy year or use Turbo Tax if it is complicated. I did make a mistake on our return last year but even our tax attorney we hired to straighten it out had to call the IRS to get a determination because they never printed any rules for that income source. So I can't quite blame Turbo Tax for not catching it.

Guest's picture
Aryn

My dad (retired accountant) is volunteering for the AARP's tax filing service. They'll help low income people file tax returns for free. And not just retirees - anyone. There are some catches - you can't have certain kinds of income that require special forms. But for most people, it's free and the AARP does train its volunteers.

Guest's picture
Guest

I work for H & R Block, and don't like the loans or the tax fees either. However the RAL is not an 8 - 15 day loan, it is a 1 to 2 day loan. The customer usually gets their money the next day if the loan goes thru. The IRAL is an instant loan. I am astounded by the fees people will pay to get their money, often has to do with the earned income credit money.