Just say no to tax refund anticipation loans
If your tax-preparation company offers you a refund anticipation loan this tax season, there's just one word you should say:
Refund anticipation loans -- short-term loans repaid by your tax refund -- come loaded with absurdly high fees and interest rates.
Thankfully, most banks have left the business.
Just one remains -- and it will stop issuing anticipation loans after this tax season.
Kentucky-based Republic Bank & Trust has been enmeshed with the FDIC over its loans and their outrageous terms. The parties reached a settlement in December with Republic agreeing that it would no longer offer refund anticipation loans after April 2012.
So this is the last year these beauties will be around to tempt you. And just how tempting are these terms?
This year, Republic is charging Jackson Hewitt and Liberty Tax customers a fee of $61.22 for a refund anticipation loan of $1,500. That's an annual percentage rate of 149%.
If the actual refund is more than $1,561.22, the taxpayer pays another $29.95 when the refund arrives, for a total of $91.17 in fees. In other words, the bank charges you an extra fee if you get more of your own money back from the IRS.
All for the privilege of getting your money no more than two weeks sooner than you would by filing electronically.
You could do better with a regular bank loan, even one of the emergency loans that banks offer at sky-high rates.
You could do better with a credit card.
You could do better by asking a friend or family member for a loan.
Heck, you could probably do better with a loan shark, at least in terms of fees and interest rates. (As far as we know, Republic doesn't break kneecaps.)
That's outrageous, especially when you consider that, in finance, investors are paid to assume risk. The more risk they take, the greater the potential payout.
Income tax refunds are a sure thing, and Republic knows it.
Treasury bonds are also government-guaranteed and are generally considered risk-free. The one-year Treasury bond, as of this writing, yields 0.18% interest. Republic earns 149% or more for making a similar loan.
Despite that, refund anticipation loans have enjoyed popularity.
The National Consumer Law Center estimates that in 2010 about 5 million taxpayers paid about $338 million in loan fees, plus more than $48 million in other fees, because of refund anticipation loans.
The consumers paying these fees are often the folks who are least able to afford it.
According to IRS data, 92% of those who applied for a refund anticipation loan in 2010 had low incomes and two-thirds received the earned income tax credit, a credit generally claimed by taxpayers with very modest incomes.
After this April, refund anticipation loans will all but disappear. Here's hoping the door doesn't hit them on the way out.