Tax-refund loans no bargain

Consumer groups say more people — but not enough — realize that loans to provide instant money from expected tax refunds may come at astronomic interest rates.

On average, the loans cost 85 percent to 170 percent annual interest (up to as high as 1,100 percent) — roughly the equivalent of a "payday loan," according to a new study by the Consumer Federation of America and the National Consumer Law Center.

"If you want a fast and free refund, you can get it in two weeks or less by using electronic filing and having refunds deposited into your own bank account," said Jean Ann Fox, director of consumer protection for CFA.

The study said more consumers seem to realize that, because the number of such loans dropped by 22 percent between 2004 and 2005. But they say too many people — especially those least able to afford them — are still obtaining such loans.

"Almost 10 million taxpayers lost a chunk of their refunds for a quickie loan, a number that is still too high. Plus, RALs (refund anticipation loans) expose taxpayers to the risk of unmanageable debt if their refunds don't arrive as expected," said Chi Chi Wu, attorney for the National Consumer Law Center.

Many tax preparers and others offer "refund anticipation loans," which are bank loans secured by the taxpayer's expected refund. The study said such loans usually cost $30 to $125 in loan fees. Often, an extra $40 application or document processing fee is charged by some independent tax preparers.

The study said that if application fees are included in calculations, the effective annual interest rates on the loans range from 57 percent to more than 1,100 percent for money on refunds that arrive within a few days or weeks anyway.

"The annualized interest rate for a loan of a typical refund size of about $2,500 can be from 85 percent to 170 percent," the study says.

It added that last year, 1 of every 13 refunds involved a refund anticipation loan. Still, the number of people taking such loans dropped from 12.4 million in 2004 to 9.6 million in 2005.

The study said taxpayers paid an estimated $960 million in loan fees in 2005 to get quick cash for their refunds.

They also paid an additional estimated $100 million in "document processing" or "application fees." It said the amount for those fees dropped significantly because H&R Block and Liberty Tax dropped those fees completely.

The study said poorer and working class families tend to seek the loans the most. It said 60 percent of refund anticipation loans go to borrowers who receive the Earned Income Tax Credit — while such people make up only 17 percent of all taxpayers.

The consumer groups also urge poorer refund recipients to use their refunds to open bank accounts — which could save them a lot of money by avoiding check-cashing fees charged by many businesses.

They said a survey of check cashing outlets by CFA member groups found they charge from 1 percent to 5.9 percent of the face value of a check to cash it. So a cashing a typical $2,500 refund check would cost $69.50 to $147.50.

The study noted that only 10 states now regulate refund anticipation loans. Utah is not one of them — and Utah has no interest rate caps for any type of loan.

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