High fees make tax-refund loans the costliest service you don't need

By Michelle Singletary

If someone owed you $1,200, would you pay someone else $100 or more to get your hands on it sooner?

If you're smart, you probably said: "No way."

But the fact is, every year thousands of taxpayers eagerly go into a tax preparer's office and give good money away for the opportunity to get their tax refund in a few days instead of a few weeks.

What these people are doing is getting a refund anticipation loan, or RAL, a short-term loan backed by a tax refund.

Typically, there are several fees charged for a refund anticipation loan, including a loan application and loan preparation fee. Those are on top of the fee charged to prepare the return and possibly to file electronically.

Unfortunately, many of the people getting these loans would qualify for free online tax preparation and electronic filing, and with a bank account they could get their refund in less than two weeks.

Every year about this time, many consumer advocates try to warn people about the high costs of tax-refund loans.

Two consumer groups recently issued a report documenting how tax refund loans cost workers $1.14 billion in loan fees in 2002, plus an additional $406 million in other fees.

According to the report, "All Drain, No Gain: Refund Anticipation Loans Continue to Sap the Hard-Earned Tax Dollars of Low-Income Americans," a RAL this year for an average refund of around $2,100 will cost $132 (on top of tax preparation fees averaging $120) and bears an effective annual interest rate (APR) of about 180 percent (240 percent if administrative fees are included).

In a report last October by the General Accounting Office, investigators found what I consider some outrageous fees. The GAO said one tax preparer indicated he would charge $174 for a RAL on a $700 refund, which equates to an annual interest rate of more than 900 percent, assuming a loan period of 10 days. Another preparer quoted a RAL fee of $130 on a $1,200 refund, equal to an annual interest rate of about 400 percent, assuming the same loan period.

About one in 10 American taxpayers took out RALs in 2002, according to the report by the National Consumer Law Center and Consumer Federation of America, and more than half of them were low-wage workers. That added up to 12.7 million refund loans in 2002.

Several states and cities have acted to inform consumers about RALs. Illinois, Minnesota, North Carolina and New York City have passed regulations requiring mandatory disclosures, including the annual percentage rate for the RAL and the estimated time to receive a refund if the taxpayer filing electronically elected to have the refund direct-deposited in his or her bank account. Consumers in these jurisdictions also are warned that they have to repay the loan if the IRS does not issue the expected tax refund.

I applaud efforts to make providers improve disclosures about these loans. But that won't stop the growth of refund anticipation loans, because lenders and tax preparers are earning easy money with little risk. They know people in need are often easily influenced.

The task continues to be for consumer advocates — and perhaps you — to get the word out. Tell any interested family member, friend, neighbor or co-worker that a fast refund loan is no bargain, and not every convenience is a good thing.

And just so you know, here's how soon you can expect your refund:

• If you file electronically and request a direct deposit to your bank account (checking or savings), you can receive your refund in less than two weeks.
• If you file electronically and request your refund by mail, it could take two to three weeks.
• If you mail your return with a request to direct-deposit your refund, it takes about four to six weeks.
• If you mail your return with a request that your refund check be mailed, it could take six to eight weeks, depending on how soon you file.

I have no doubt that many people getting refund loans can tell the saddest stories about why they need the money in a hurry. But if you're broke, the last thing you should do is pay for something you would get anyway. William Shakespeare was right when he wrote: "How poor are they that have not patience!"