New tax refund loans come at exorbitant fees and rates

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No matter how much money you need for your tax refund, beware of tax-time expensive loans.

A new generation of expensive tax refund loans is emerging this tax season.

Prepayment loans, which cover a consumer’s expected tax refund until they arrive, were previously offered by banks until regulators cracked down on them. Now tax preparers and non-banks According to a report by the National Consumer Law Center and the Consumer Federation of America, lenders like payday loan and cash advance companies are getting into the act, offering equally expensive products.

“While we are happy to see the disappearance of banking RALs [refund anticipation loans], consumers should avoid the other pitfalls that still exist, ”said Chi Chi Wu, staff attorney at the NCLC.

Related: 3 Ways To Lower Your Tax Bill

Among the products the NCLC recommends watching: Liberty Tax Service offers tax-time loans to clients in 26 states with loans in at least one state with a fee of $ 49.90, plus a non-interest amount. disclosed. An interest rate of 36%, typical of this type of loan, would leave a borrower owing about $ 80 for a $ 2,000 15-day loan. Liberty Tax Service did not return a request for comment on its product and pricing.

Find Hidden Tax Refund Money

Jackson Hewitt offers tax-time lines of credit ranging from $ 200 to $ 1,000, with an interest rate of 35%, a monthly fee of $ 6.25, and a fee of 3% or $ 10 each time you access the line of credit, according to its website. A customer who takes out a $ 500 line of credit for a month could end up paying more than $ 30 in fees and interest. Jackson Hewitt did not respond to a request for comment.

Other businesses immediately pay customers a portion of their expected refund, then take the full amount for themselves when it arrives. They often advertise this as “buying” a taxpayer’s refund, but the NCLC said it was basically an RAL since customers always hand over a portion of their expected refund to get the money over. early.

AIT Financial Group, for example, launched a product this year that pays $ 600 to someone who expects a refund of $ 700 to $ 725 and will pay $ 1,250 for a refund of $ 1,500 to $ 1,600. .

AIT spokesperson Nathan Adams said there was a high demand for these products – which typically make customers money within 48 hours – and that they plan to get rid of their structure. price in the future and let customers negotiate what they want. prices.

Related: Americans In A Love-Hate Relationship With Payday Loans

The NCLC also found that some shady tax preparers even offer tax refund loans to lure taxpayers into their offices, but have no intention of lending them the money. Instead, they try to convince them to sign up – and pay – for tax preparation services.

While short-term loans may seem like the only option for financially troubled consumers, most people receive repayments from the IRS in less than three weeks if they electronically deposit and deposit the money directly into their account. . So it’s usually not worth the trouble to speed up the process slightly, Wu said.

“The problem is, desperate people are very vulnerable when dealing with lenders, Wu said.

A common alternative to prepayment anticipation loans are prepayment anticipation checks. Prepayment prepayment checks typically cost between $ 30 and $ 55, and some companies add additional fees that can run into the hundreds of dollars. Typically, a lender sets up a single bank account where a refund can be deposited, and then a check or prepaid card is issued to the consumer so that they can access the money.

Related: Prisoners Rake In Millions From Tax Evasion

It is often an attractive option for taxpayers without bank account, but that doesn’t help consumers get their refunds faster than if they opened a bank account or prepaid card on their own, which they could do for free.

“If they have a bank account, they can get their refunds just as quickly using direct deposit and electronic deposit. [their taxes]. And if they don’t have a bank account, now would be a good time to open a savings account and use it to get their repayment, “she said.

Some tax preparers also offer advance refund checks. to allow customers to defer tax preparation fees until the refund arrives. But Wu said that especially for low-income clients, there are many free tax preparation options, such as the IRS’s Volunteer Income Tax Assistance program.

CNNMoney (New York) First published on March 6, 2013: 10:28 a.m. ET

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