Not too many years ago, when a taxpayer wanted his tax refund as soon as possible, he might turn to a tax refund loan provider. The taxpayer would get a short-term loan based on what he expected his federal refund amount to be and then pay back the loan when the U.S. Treasury money finally arrived.
But if the refund was less than expected or the taxpayer had to (or chose to) spend both the loan money and then the refund amount, then he ended up owing a lot in interest and fees to the lender as he paid back the loan for longer than the original short term.
The good news now is that those extraordinarily expensive tax refund anticipation loans are almost a thing of the past.
The bad news is that predatory lenders are always working on new ways to get your money, especially at tax time.
Tracking the problem
The National Consumer Law Center and the Consumer Federation of America have been tracking refund loan activity for more than a decade. In the organizations' latest report on the tax-time financial products industry, researchers found that refund anticipation loans, usually referred to as RALs, are no longer available from banks on a large-scale, nationwide basis.
Banks and other lenders have simply found that the costs, both financial and to their reputations, are not worth the trouble of issuing RALs.
That means that millions of taxpayers this filing season won't be wasting money on RALs, according to the report "Something Old, Something New in Tax-Time Financial Products: Refund Anticipation Checks and the Next Wave of Quickie Tax Loans."
But, says the report, RALs are still available from fringe, nonbank lenders.
"While we are glad to see the disappearance of bank RALs, consumers should avoid the other traps still out there on the market," says Chi Chi Wu, staff attorney at the National Consumer Law Center.
Payday lenders remain a common RAL source, according to the study.
RALs may pop up in new ways
Shady tax preparers also often offer what the report calls phantom RALs. In these instances, the preparers promoted the quickie loans as a way to get fast access to pending tax refund money, but they didn't have the financial capacity to make them to a large number of customers.
Essentially, they were tax refund bait-and-switch schemes to get customers into their offices.
Another instrument also has taken the place of RALs -- the tax refund anticipation check, or RAC. These checks do not deliver refunds any faster than the IRS can, say consumer groups, yet they cost $30 to $55. And some preparers charge additional RAC fees.
The widespread use of online tax filing and direct deposit of refunds also has helped diminish the appeal of refund loans. But with the delay in the filing season this year because of slow congressional action on 2012 tax laws and the subsequent time it took the Internal Revenue Service to update forms and upgrade its computer system, many might be tempted to use a short-term loan.
Don't. There are plenty of tax refund loan alternatives.
Start with tax filing. There are plenty of sites that can help lower-income taxpayers prepare and file their taxes, and get their refunds, for free or very low costs. They include Volunteer Income Tax Assistance, or VITA (available via (800) 906-9887 or the IRS website) and AARP's Tax-Aide sites.
And don't forget the IRS' own Free File. If your adjusted gross income is less than $57,000 then you can use the online tax prep and no-cost filing site.
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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."