Tax refund loans offer money now, but they are costly in the long run


Published: Tuesday, January 30, 2007 at 6:01 a.m.
Last Modified: Monday, January 29, 2007 at 11:03 p.m.

PHILADELPHIA — If you don't have your W-2 yet but are already itching to cash in on your tax refund, that's no problem for H&R Block, Jackson Hewitt and others in the tax-preparation business. The companies known for helping you file your 1040 are going all-out to sell you the latest version of the "refund anticipation loan."

The twist is that now the anticipating can start earlier than ever. Block began offering its "Instant Money" loan in November. Jackson Hewitt launched "Holiday Express Loans" well before Christmas, and "Money Now" once New Year's passed.

Just bring your pay stub, so the tax preparers can predict what you'll get back from Uncle Sam. But watch out: The quick cash can come at a steep price.

Even H&R Block's bargain-price version — rolled out shortly after Block's CEO urged his competitors to quit making these high-cost "pay-stub loans" — will cost borrowers the equivalent of 36 percent to 295 percent annual interest. (APRs vary widely on refund loans because they can include flat-fee charges.)

If you borrowed $500 from Block on Dec. 18, taking payment by check, you'd have walked out with only about $445. More than 10 percent of the loan, $54, would go to interest and fees — equivalent to an annual percentage rate of 70 percent.

Block has capped costs at 36 percent for borrowers who take payment on a prepaid MasterCard. But APRs from other tax preparers sometimes top 500 percent, advocates say.

And make sure you file your actual taxes as soon as your W-2 arrives. The pay-stub loans expire in mid-February. To pay them off, some borrowers may then have to take out traditional refund anticipation loans — which consumer advocates have long criticized as both pricey and pointless.

Critics of refund loans say taxpayers lured by quick cash pay high rates and fees just to get money they already have coming to them, in full, if they can wait an extra week or two.

On Jan. 16, the Internal Revenue Service weighed in on the side of the critics. It barred the 20 companies that offer free filing via the IRS site (www.irs.gov) from trying to sell refund loans to the millions of taxpayers who use the service.

"We know some people can't wait," said Burt DuMars, director of electronic tax administration. "If they can, it's going to save them a lot of money."

Lots of money is at stake. In 2005, U.S. taxpayers spent about $1 billion on interest and fees related to refund anticipation loans, according to a report by the National Consumer Law Center and the Consumer Federation of America.

To those groups, that's progress: Two years earlier, they estimated the cost of such loans at $1.4 billion. But they haven't quit railing against the loans, especially since so much of the money is siphoned from the Earned Income Tax Credit, the program that supplements the income of the working poor.

Jean Hunt, executive director of Philadelphia's Campaign for Working Families, said even the best-priced refund loans are a bad deal for taxpayers, and especially for low-income or elderly taxpayers who are eligible for free tax-return services from her organization and others.

"Keep it in your wallet," Hunt said. "Don't put it in theirs."

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