Dangers of Tax Refund Anticipation Loans: Why Borrowing Against a Tax Return Can Be a Costly Mistake

A report from the National Consumer Law Center found that refund anticipation loans cost taxpayers an estimated $833 million dollars in loan fees in 2017. Taxpayers also spent an additional $68 million dollars on other fees associated with refund loans and $336 million dollars on financial products related to receiving their refunds. Tax refund anticipation loans are highly profitable for the businesses that issue them but extremely costly for consumers who take advantage of them.

How a Refund Anticipation Loan Works

A refund anticipation loan is essentially a high-interest, short-term loan that is made to consumers based on the estimated amount of their income tax return. Funds are typically either made available via separate bank account set up by the tax office or a prepaid debt card. The loan is extended to the consumer typically for a period of seven to fourteen days and must be repaid when the individual receives his or her income tax refund.

Costs Associated with Tax Refund Loans

The primary cost associated with refund anticipation loans are the interest rates associated with these loans. Interest rates for a refund loan may range from fifty to five hundred percent. Depending on how the tax return is filed, it may take anywhere from two to ten weeks for the refund to be received, during which time the interest may eat away the refund completely.

In addition to the exorbitant interest rates associated with refund loans, there are also a number of potentially hefty fees. Many tax preparers that offer refund anticipation loans charge an upfront processing fee, which may be anywhere from $40 to $100 dollars. If the funds are deposited into a bank account created specifically for that purpose, their is a separate charge for the creation of the bank account, also around $100. If a refund loan is direct deposited onto a prepaid debit card there may be a significant service associated with use of the card.

Additionally, if the amount of the refund anticipation loan is greater than the amount of the refund, the taxpayer is responsible for repaying the difference, along with any accrued finance charges and/or late fees. Failure to repay the outstanding loan balance may result in the account being reported negatively to the credit bureaus and collection actions against the individual.

Finding a Reputable Refund Anticipation Loan Service

Before opting for a refund anticipation loan, taxpayers are advised to check the accreditation and licensing of the tax preparation service in question. Local offices of the Better Business Bureau are able to provide specific information about local business at no charge to consumers along with a list of certified accountants in the area. Consumer review websites or trade magazines may also provide insight into a particular business’s practices and reputation.

For individuals who are strapped for cash, a refund anticipation loan may make sense if they are willing to sacrifice a sizable portion of their refund. Consumers who can afford to wait for their tax refund should consider using the Internal Revenue Service’s free E-filing process, which can make refunds available in as little as seven to fourteen days.