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Many “Quick Tax Refunds” are actually high cost loans
The ads are enticing. “Instant Refunds”, “Fast Cash Refunds”, and “Quick Money”, might make you want to rush to your nearest tax preparation service not only to get your income tax returns prepared, but more importantly, to get your refund on the spot.
Unfortunately, many of these fast “refunds” are actually loans called “refund anticipation loans” (RAL’s). When you get a RAL, you are actually borrowing your own money, money that you would have been getting back as a tax refund.
When you receive a RAL, your tax preparer lends you the amount of your tax refund less the cost of interest and fees for the loan. When the government sends your actual refund check, it is direct deposited into the bank that made the loan.
RALs come in all shapes and sizes
Do not be fooled by the commercial that encourages you to bring your taxes into the local car dealer or furniture store where the merchant will not only prepare your taxes for you, but also permit you to use your refund as a down payment on a car or new furniture. Other merchants may offer you debit or “cash” cards with the amount of your refund on it so that you can get cash or purchase items you want.
Some of these offers might be good deals, but others might simply be RAL’s under another name.
Be sure you read the fine print and ask a lot of questions.
What is the interest rate?
What fees are you being charged?
What happens if your tax refund is less than you thought it would be?
Only by finding out all the facts can you make a choice that is right for you.
High costs and fees
You might be thinking, “So what if it is a loan? I can get my refund now.” True, but the loan you are getting is usually very, very expensive.
Americans pay millions in RAL costs and fees. RAL’s often carry annual percentage interest rates ranging anywhere from 70% to more than 700%.
In addition, there are typically other charges including electronic filing fees, application fees, and a fee to cash the loan check. When all the costs of a RAL are added up, you can be spending more than 10% of your refund just to get your money a few days sooner.
Another risk of RALs
Sometimes the refund your tax return says you are supposed to get might not be the refund you actually get. Things like unpaid child support or traffic tickets can often be deducted from your refund before it is sent to you.
If you get a RAL for the entire amount of the refund shown on your tax return without knowing about these deductions, you will still owe the entire amount of the RAL even though your refund might be substantially less. If that happens, those extremely high interest rates still apply and you might have big problems in repaying the RAL.
Non-payment will hurt your credit rating and might subject you to litigation and garnishment of your wages.
Win-win alternatives
You can avoid the high cost and risks of RAL’s and get your tax refund back quickly at the same time. Here are some ways to do that:
E-file with direct deposit. File your tax returns electronically and tell the IRS and state to direct deposit your refund into your bank account.
Get a bank account if you do not have one. Many taxpayers think they cannot e-file their tax returns since they do not have a bank account into which their refund can be deposited. Banks and credit unions often allow you to open an account with as little as a $5 or $10 deposit. Opening an account will allow the government to deposit your refund directly into the account which will get your refund to you more quickly.
Plan ahead. With e-file and direct deposit, most taxpayers can get their refunds in less than 10 days without having to pay the costs of a RAL. File your taxes as soon as possible so that you are able to wait 10 days for your refund. If you have an urgent bill to pay, tell your creditor that you have e-filed your return and expect your refund soon. Your creditor might very well be able to wait the extra time and you will not be taking out a new, expensive debt to pay an old debt.
Avoid check cashers. Check cashers can be expensive, and some charge extra to cash RAL and refund checks. Some charge as much as $60 to cash a refund check or RAL of $2,000. Go to the bank where you have your account and cash the check there. It will either be free or at a much lower cost.
Use a VITA site to get your tax return prepared and filed. VITA (Volunteer Income Tax Assistance) sites provide free tax preparation for low and moderate income people. Many will also e-file your return for free.
To find the nearest VITA site, call the Consumer Protection Hotline at (800) 422-7128 or visit the Wisconsin Department of Revenue website at
https://www.revenue.wi.gov/Pages/faqs/pcs-vita.aspx.