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Instant Tax Refund Always Carries a Price

Nothing free about refund anticipation loans

By Mark Huffman
ConsumerAffairs.com

January 23, 2008

What exactly is a refund anticipation loan?

H&R Block, the nationwide financial services firm that pioneered the RAL, settled a class action lawsuit in 2006 that challenged the fees and interest rates it charged for refund anticipation loans. Now, on its Web site, it offers this disclosure to consumers:

"A refund anticipation loan is a short-term loan secured by a taxpayer's anticipated federal income tax refund. The loan is made by a third-party lending bank and facilitated by H&R Block in its tax offices. "Taxpayers choose refund anticipation loans because they can receive money in one to two days, compared to waiting up to 15 days for a tax refund to be directly deposited into their existing bank account or three to eight weeks for a mailed IRS refund check."

Note the time difference in when the taxpayer receives the money -- one or two days with an RAL, but "up to 15 days" by simply waiting for the refund from the IRS. So, what does it cost to save 10 or twelve days?

"There are two bank fees associated with a RAL: a refund account fee and a finance charge," H&R Block says on its Web site.

The amount of the fees varies, but when measured as payment for a loan of less than two weeks, the annual interest rate can be extremely high.

Low-income taxpayers targeted

"RALs continue to drain over a billion dollars from the pockets of American taxpayers including Earn Income Tax Credit recipients," said the Center For Responsible Lending, in a statement.

The Earned Income Tax Credit (EITC) is a refundable credit provided through the tax system and intended to boost low-wage workers out of poverty. The EITC is the largest federal anti-poverty program providing over $38.7 billion to 22 million families in 2004.

So, even though these wage earners paid little or nothing in the way of taxes, they are entitled under the EITC to sometimes fairly large tax refunds. Consumer groups argue that many RALs are targeted at this group.

In 2007 H&R Block introduced an option to its RAL program that adds even more fees. Now, instead of receiving a check or having the loan amount deposited directly in a bank account, taxpayers may get their loan proceeds on plastic.

Prepaid credit cards

"This year, clients can receive the proceeds of their loan payment on the H&R Block Emerald Prepaid MasterCard, which is tied to an FDIC-insured bank account," said Tim Gokey, President, H&R Block Retail Tax Services, in January 2007. "Clients can direct deposit funds to the account year-round with no fee for point-of-sale purchases, have access to a worldwide ATM network, and can avoid expensive check-cashing fees."

While the card might prove convenient for someone who does not have a bank account, it does not come without fees.

First, the user is charged $1.85 each time the card is used at an in-network ATM. There is an additional fee if the ATM is outside the network, and you may be charged, even if you don't complete the transaction. To add insult to injury, if you are denied cash when using your card at an ATM, you are charged 50 cents.

While Internet account balance inquiries are free, you will be charged $1 a month for a statement through the mail. Need to talk to a customer service rep? It'll cost you $2.

Really free

But regardless of how the loan is paid, state attorneys general and consumer groups are nearly unanimous in their advice to consumers to avoid RALs in any form.

"Taxpayers can save themselves expensive fees by saying 'no' to RALs," said the National Consumer Law Center and Consumer Federation of America, in a joint report. "If they want quick refunds, they can get them in two weeks or less by filing their tax returns electronically and having refunds directly deposited into their own bank accounts. That's a FREE quick refund."

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