Refund loans take a hit

Wednesday Feb. 10, 2010
Posted 11 a.m. EDT

The bad economy may finally accomplish something that consumer advocates have been trying to do for years: reduce refund anticipation loans.

These short-term loans, usually referred to as RALs, are handed out based on presumed federal tax refunds. They have two big drawbacks.

First, sometimes the refunds don't materialize as expected. Loan recipients are then left with no money to pay back the loans.

Second, these loans typically have high interest rates, as well as other fees that can add up quickly. Some even compare the products to legal loan sharking.

The interest on the instant rapid refund offered by H&R Block is nearly four times the average rate charged on credit cards, according to Fortune magazine. The annual percentage rate, or APR, for various types of quick tax cash products from a couple of different lenders go from 60 percent to 140 percent to 185 percent.

Consumer groups have been trying for years to eradicate RALs. Congress and other government agencies also have examined ways to discourage lenders from making these loans.

And a few years ago, the IRS told participants in the Free File program that they couldn't market refund loans (or other financial products) to filers who use the no-cost electronic filing service.

Still, impatient taxpayers keep taking out these loans instead of turning to alternatives that could get them their tax refunds almost as quickly.

That, however, seems to be changing, thanks in large part to the tight economy and tougher lending standards.

The number of refund anticipation loans available this tax season shrank after the tax preparation chain Jackson Hewitt announced that a unit of Pacific Capital Bancorp, or PCBC, the lender with which the tax preparation company partnered to offer the loans, will be able to provide only half of the needed money.

Even more notable, this filing season H&R Block, which in past tax-filing seasons had heavily promoted its Rapid Refund version of the loans, isn't advertising the product. Company CEO Russ Smyth told investors in December the firm is moving away from an "overemphasis" on "fast money" because it damaged the company's brand image.

The loans also damaged, rather than helped, the financial lives of a lot of taxpayers. Here's hoping that even after the economy improves, the market for RALs will continue to dwindle.

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