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
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
But tax preparers are by no means the only refund-loan
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
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
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
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.
Updated: March 15, 2006