tax

Cheap, fast refund loan alternatives



Just discovered you'll be getting a tax refund? Don't let your enthusiasm to spend that unexpected money get the better of you.

Thanks to today's technology, there's really no need to pay extra for a refund anticipation loan, or RAL, just to get your hands on your tax money a tiny bit sooner. If instant cash is more a desire than a need when considering a quick refund, consider these alternatives:

  • Go electronic. Abandon the traditional paper return sent via the U.S. mail and file from your computer. Last year, more than 73 million taxpayers filed their returns electronically. You'll get the money almost as fast as you would with a refund anticipation loan and get it without paying any loan fees or interest.
  • In fact, you may not need to pay for anything. An Internal Revenue Service partnership with tax preparers and software companies offers free online tax preparation and e-filing to some taxpayers. The IRS says that whereas paper filers could wait up to eight weeks for their refunds, most electronic filers can expect their tax checks to show up in their mailboxes in half that time or less. The agency also points out that the error rate is less than 1 percent for electronic filers.
  • Direct deposit. Electronic filers who opt for refund direct deposit do even better. More than 61 million people got their refunds this way last year, an 8 percent increase from the year before. The IRS says the money generally shows up in taxpayer bank accounts in 10 to 14 days. Even if you file the old-fashioned paper way, having your refund deposited directly into a bank account cuts the time you have to wait for your tax cash. Plus, it's added protection against lost or stolen refund checks sent via the mail.
  • Use store financing. If you want your refund to finance a must-have new appliance, store interest rates usually will be better. Many stores offer free financing for limited time periods. By then, the refund should have arrived and you can use it to pay off the store credit -- and pay no interest at all.

Impatience usually wins
But ultimately, a refund anticipation loan is a personal preference, not a fiscal issue for taxpayers. Watch: "Refund anticipation loans"

"Theoretically, with electronic filing and quicker turnaround on refunds, the need for tax anticipation loans has become obsolete," says John L. Stancil, an associate professor of accounting and tax at Florida Southern College in Lakeland. "However, my observation is that they appear to actually be on the increase, as people become more and more impatient to get their refund.

"One sample I saw from a major company who provides these loans through tax preparers disclosed an annual percentage rate of 264 percent on the loan," he says. "All year long, taxpayers have made the government an interest-free loan, and now they are paying 264 percent to get their own money back a few days quicker."

Companies that offer refund loans, such as such as H&R Block, are well aware of such impatience, and that's why the loans survive even as electronic filing increases.

The tax-preparation giant notes on its Web site, "Taxpayers choose refund anticipation loans because they can receive money in one to two days, compared to waiting up to 15 days for a tax refund to be directly deposited into their existing bank account or three to eight weeks for a mailed IRS refund check."

That pitch definitely appeals to those who value speed over cost, such as a person who stands impatiently in front of the microwave wondering when dinner will be done.

Recently, larger tax-preparation companies have been offering these impatient customers RALs on an easy-to-use prepaid debit card. The ease of a debit card coupled with the draw of an "instant refund" tempt customers looking for a speedy return. With all the pluses of these promises, many customers fail to see all the charges incurred for their impatience. These charges include tax preparer fees, account fees and finance charges, as well as the fees of the card itself, which include charges for ATM withdrawals, balance inquiries and denials to speaking with a live customer service representative. It's a double-whammy for many expecting to see every cent of what their return, only a few days sooner.

But if you can squelch your refund appetite for just a few days, then you -- and your bank account -- will be better off.

-- Updated: Feb. 5, 2008

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