Beware tax refund loan cousins

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Quick cash based on expected federal tax refund amounts, known as a tax refund anticipation loan, or RAL, isn’t quite the big business it used to be.

But since this is America where ingenuity is rewarded, similar products have taken the place of these potentially costly refund loans.

First, a quick obituary for the strict refund loans. The efforts of consumer advocacy groups to educate people about the loans’ high interest costs, along with the Internal Revenue Service decision to quit issuing information that made it easier to issue them, have led to a steady decline in the tax-related loans. Federal bank regulators also have tightened the screws on these products.

But the idea of getting your tax refund ASAP is still strong. And that’s where good old American capitalism and creativity meet.

H&R Block, once a leading tax refund loan provider, announced last September that it would no longer offer tax refund anticipation loans. But the Kansas City, Mo.-based tax preparation giant is giving customers the option of receiving a refund anticipation check, or RAC.

Aimed at filers who don’t have bank accounts into which the IRS could directly deposit the refunds, Block says the taxpayers can get their tax money more quickly than they would waiting for Uncle Sam to mail a paper check.

That’s true. And the unbanked taxpayer population is a challenge that the Treasury Department is still grappling to solve.

But Block and other companies offering similar filing and refund options also have associated fees. And if the taxpayer gets the tax refund put on a prepaid credit card, another RAC option, there are more fees when the money is withdrawn at ATMs.

And a few RALs are hanging on for dear life.

“Bank Talk,” a blog that follows products offered to those without bank accounts, reports that JTH Holding Inc., which runs the Liberty Tax chain, is preparing to go public and its prospectus indicates that it has landed an unnamed nonbank partner to offer a product similar to refund anticipation loans.

The nonbank characterization is important since the underwriter of these new tax refund loans will not be subject to those aforementioned federal rules.

JTH Holding will have to bear more risk for any losses incurred by these so-called instant cash advances. You know what that means. More cost to the consumer. In fact, says “Bank Talk,” “JTH acknowledges that the new loans will probably cost more than the old RALs.”

Bottom line: Refund loans and their tax-related quick tax cash cousins are not dead yet.

Consider this fair warning as tax-filing season 2012 is about to begin.

Have you ever gotten a tax refund anticipation loan? How did it work out for you?

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