Risks and Costs of Tax Refund Anticipation Loans*
Refund anticipation loans (RALS) are short-term loans that carry a big price tag. In 2002 low income taxpayers paid over $1 Billion in loan charges and fees, nation-wide.
RALS have interest rates that range from 97% to over 2,000%. For a tax refund of $2,000 you might pay as much as 10% of your refund in fees, an effective interest rate of 142% on your own money!
Here are some ways you save money at tax time…
- Call (615) 862-5000 for the location of the nearest free tax preparation service.
- Do your own taxes. There are a growing number of sites on the internet that allow you to file safely, for free. If you are eligible for the earned income tax credit you can file for free at www.taxfreedom.org or www.icanefile.org.
- Cool it. Do you really have to have your refund right away? If a RAL costs $100, look at waiting this way. If it takes 10 days for the IRS to process your electronic return, you are paying yourself $10 a day for waiting. Not a bad wage for doing nothing!
- Avoid check cashers. Get a bank account. Your refund can be direct deposited, thereby avoiding the need to pay a check casher. A 3% fee to cash a $2,000 refund check is $60. If you add that to the $100 you save on a RAL, your average daily pay for doing nothing goes up to $16 a day.
*Adapted from National Consumer Law Center, Inc. http://www.consumerlaw.org/initiatives/refund_anticipation/content/RALBrochure.pdf