What's replacing nasty tax refund anticipation loans?
It's tough being a savvy consumer in the United States when the financial deck is so very stacked against us.
Free checking accounts are an endangered species, there's evidence mortgage rates should be lower than they are and it's all but impossible to find a decent savings rate.
But there is at least one pro-consumer bit of news to crow about: It's become much harder to get a Refund Anticipation Loan, or RAL — a predatory loan secured by a taxpayer's anticipated income tax refund.
Watch TV lately?
About this time of year, you're typically assaulted with ads telling you how you can get your tax refund early. Just walk into your big-box tax preparer and grab that check!
But those ads are gone for good this year. That's because the federal government essentially forced the banks backing these loans out of the business, leaving tax preparers without a RAL partner.
This is good news. Most consumers thought they were getting their tax refund early. Instead, they were taking out a one- to two-week loan with APRs averaging 149%, according to the National Consumer Law Center.
High Cost of an RAL
That's a true rip-off.
In 2011, consumers lost $33.7 million through RAL fees, down significantly from their 2002 peak, when 12.7 million taxpayers shelled out $1.1 billion in loan fees.
It was a horrible way to prey on people who needed money fast.
Which is why getting the big tax prep chains out of the business is a good thing. The last bank offering these loans — Kentucky-based Republic Bank & Trust — killed its business after last tax season under an agreement with the FDIC.
Still, this doesn't mean you can let down your guard.
In January, the National Consumer Law Center put out a warning that some lenders they call "fringe" and "shady" are still trying to sell consumers three money-draining products at tax time:
- RALs made with nonbank lenders. "These loans could be more expensive and riskier than bank RALs," according the NCLC. Liberty Tax Service — the company that puts people in Statue of Liberty costumes on busy street corners — has partnered with an unnamed nonbank lender in 30 states to push these high-cost loans.
- Phantom RALs, which are offers of loans that don't exist just to get customers into their locations and charge $500 or more for tax preparation services.
- Refund Anticipation Checks (RAC) that don't deliver refunds any faster than the IRS does, but with $60 or more in added fees. "Since one of their purposes is to defer payment of the tax preparation fee until the refund arrives, RACs may represent a high-cost loan of that fee," according to the NCLC. "If a taxpayer pays $30 to defer payment of a $200 tax preparation fee for three weeks, the APR would be equivalent to 260%."
Now, watchdogs like the National Consumer Law Center say these practices won't be as widespread as bank-backed refund anticipation loans once were.
Even so, your best bet is still to get your refund directly from the federal government, no middle man required.