Why Instant Tax Refunds Are Not A Wise Choice
With Tax season in full swing and high unemployment rate, some people need instant cash, so what they would do is they borrow against their tax refunds. However, the hefty costs associated with this unwise practice would be unconscionable and literally immoral and arguably illegal.
REFUND ANTICIPATION LOANS (RALs)
Refund anticipation loans are loans to borrowers secured by their tax refunds with:
- Short Duration, usually two weeks or so, until the lender is repaid by borrower’s tax refund.
- Automatic repayment of loans to lender by the IRS tax refund.
- High costs to borrower anywhere from $34 for a $300 loan to $130 for a $9,999 loan.
SERIOUS COSTS TO BORROWERS
- Borrowers Would Incur Very High Costs:The $34 cost would amount to 500% Annual Percentage Rate (APR). The $130 cost for $9,999 would be equivalent to 50% APR.
- Other Charges Would Hike the APR Even Further: Yet, these calculations DO NOT INCLUDE other costs charged by tax preparers or banks. For instance, an added $40 cost could hike the effective APR to 1300%.
- Costs Would Be Especially Hard on Low-Income Families:These costs are especially unconscionable for low0income families who are the recipients of Earned Income Tax Credit, the nation’s largest anti-impoverished program.
EASY MONEY FOR LENDERS
- Lenders Would Receive Relatively Fast and Low-Risk Income: Since the duration of such loans would not usually last longer than two weeks and IRS usually pays the refunds, the lenders get paid. Even if the lenders do not get paid, they can still go after the borrower and charge the borrower interest on outstanding balances.
THE IRS MIGHT SHUT DOWN RAL OPERATIONS
The IRS announced in January that it would create a task force to examine the sale of financial products by tax preparers. The task force could shut down RAL operations as they charge such hefty and unreasonable fees.
However, the IRS so far does not have the authority to crack down on such practices.
USE E-FILE AND RECEIVE DIRECT PAYMENTS
One of the best options to avoid paying such hefty fees would be to file online and get a direct deposit into your bank account in as few as 10 business days or so.