Millions of Americans look forward to tax season. They're getting refunds and desperately need that check from the Internal Revenue Service.

In fact, many are so cash-strapped they don't even wait for Uncle Sam. They turn instead to refund anticipation loans. Watch: "Refund anticipation loans"

You've seen the ads. Simply sign a form with your tax preparer when filing your taxes, pay a fee and walk out with up to $5,000 cash against your coming refund check.

What you may not notice is the exorbitant annual percentage rate on that loan. But consumer groups have. They say these short-term, high-interest loans prey on the very people who can least afford them.

Critics of refund loans, as the loans are commonly known, point to the disparity between the tax advances and other credit offerings aimed at wealthier customers.

Tax preparers, both independent operations and major chains, charge interest rates that can run on an annualized basis well into triple figures, all for the privilege of getting money a few days earlier. The IRS further mitigates the risk to lenders with its Debt Indicator service, alerting them to any claims (child support, unpaid federal student loan) against refund-loan applicants' refunds.

"It's an outrageous rate for a really short-term loan which, by the way, is a fairly low risk to the lender, and it's an even lower risk because the IRS helps them flag who is going to present a risk," says Chi Chi Wu, staff attorney for the National Consumer Law Center. NCLC, in conjunction with the Consumer Federation of America, conducts an annual review of refund loans and issues a report of its findings.

"Yes, it seems like a small amount of money and it would be if this were a one- or two-year loan, but it's not. It's a 10-day loan. That makes all the difference in the world."

Just how do refund loan lenders get away with the high interest rates? Major tax preparers circumvent state usury rate caps by partnering with banks chartered in states such as South Dakota and Delaware that have no caps.

Impatience versus loan terms
But tax preparers are by no means the only refund-loan vendors.

Car dealers have applied anticipated refunds toward auto down payments, joining check-cashing services, retailers, Internet sites and tax-software companies in promoting the loans as tax-season incentives to get more business.

And it's not always someone needing rent money who signs up for a refund loan. Car dealers employ the tax-advance loan concept because it pulls in buyers. Tax preparers say the loans also are popular ways for impatient taxpayers to pay for vacations, large appliances or home entertainment systems.

The lending company Household International is the nation's leading servicer of refund anticipation loans and handles the product through thousands of tax preparers. The company is well aware of the criticism surrounding the product.

"Household understands that a refund anticipation loan is not the right option for everyone," says Mark Friedlander, director of the company's public relations. "Thus we strive to ensure that every customer has the resources they need to make a fully informed decision about whether or not to use the refund anticipation loan product." To that end, says Friedlander, his company has instituted mandatory loan provider training, customer hot lines and financial education resources for customers.

But ultimately, the deciding factor for many refund loan applicants is likely to remain their desire for tax money sooner, no matter what the cost. That impatience, says a spokesman for H&R Block, is why the loans survive.

A vicious cycle
Refund-loan opponents contend, however, that the biggest market for the loans is not impulsive shoppers, but the working poor.

The NCLC and the Consumer Federation of America released their first major report on refund loans and customers in 2002. The organizations' 2006 report, based on data complete through 2004, shows that 12.38 million taxpayers got refund loans during that filing season, a slight increase from the 12.15 million such loans in 2003.

To obtain the loans, the report says, consumers paid almost $1.24 billion in loan fees, "essentially borrowing their own money at extremely high interest rates." They paid another $360 million in administrative, electronic filing and application fees..

The more disturbing statistic to consumer advocates is that refund loan recipients are overwhelmingly lower-income taxpayers. The latest data shows that 56 percent of the refund loan customers, or roughly 7 million families, were recipients of the Earned Income Tax Credit, the largest federal poverty assistance program.

These taxpayers are typically caught in the vicious cycle of circumstances that enable refund-loan providers to take a loan-shark-size bite out of the filers' limited funds. Although their income may be minimal, the paperwork to receive the EITC is not. The tax forms and computations are especially challenging for those facing education, literacy and language barriers.

As a result, EITC-eligible filers frequently use a commercial tax preparer. Once there, many opt for a refund loan to pay their tax-preparation fees, never realizing that it is a loan and not the refund itself.

In addition, many of these same taxpayers are without commercial bank accounts. A refund loan creates a one-time-use account into which the taxpayer's refund is directly deposited by the IRS -- and from which the lender takes its share before delivering the balance to the customer.