Taxpayers Find Fewer Refund Anticipation Loan Options

 With H&R Block's announcement last month it would not be able to offer refund anticipation loans in the current tax filing season, many hard-pressed taxpayers are searching for alternatives.

While consumer advocates and personal finance experts strongly advise against paying hefty fees to borrow against a tax refund, many consumers do it each year, citing the need for instant cash. With Block out of the picture, what choices do they have?

Wall Street seems to think the business will go to Block's rival, Jackson Hewitt

. The same week H&R Block announced its inability to provide the refund anticipation loans, Jackson Hewitt announced an amended contract with its funding source, Republic Bank & Trust Co. As a result, Hewitt will be able to provide refund anticipation loans, or as the company refers to them, "rapid refunds," up to 80 percent of the anticipated refund.

The two announcements last month sent H&R Block shares tumbling and Jackson Hewitt stock soaring as investors assumed a lot of H&R Block business would migrate to Jackson Hewitt.

Refund anticipation loans have become more popular in recent years with consumers who live paycheck to paycheck. The product is actually a short-term loan backed by the expected refund from the IRS. In most cases, the tax preparation fees are also deducted from the amount of the loan.

The Center for Responsible Lending strongly advises against taking out a refund anticipation loan, noting the high interest rates, ranging from about 50 percent to over 500 percent APR. They also only speed up the refund process by as little as one week, compared to what consumers can expect by filing online and having their refunds deposited directly into their banking accounts, the group says.

According to a study by the National Consumer Law Center and the Consumer Federation of America, refund anticipation loans drained the refunds of about 8.4 million taxpayers in 2008, costing them around $738 million in loan fees, plus over $68 million in other related fees.

Lenders souring on these loans

While this kind of loan has long been viewed as bad for consumers but good for tax preparers and lenders, it has fallen out of favor with the latter group. Lenders are displeased with an Internal Revenue Service (IRS) rule change that eliminated a code that told tax preparers whether the taxpayers owed back taxes.

Without that piece of information, tax preparers and lenders providing the refund anticipation loan don't know for sure whether the taxpayers will receive the full refund, or whether part of it will be used to cover the back taxes. That adds an element of risk to a deal that, up until now, had been practically risk-free.

To compensate for this new risk, Hewitt and rival firms still providing refund anticipation loans, will withhold a portion of the loan amount for more than two weeks. That means the taxpayer taking out the refund anticipation loan will not have immediate access to their full refund.

Liberty Tax Service is still offering refund anticipation loans for the current tax season. It says that, after IRS acceptance, a refund anticipation loan is available in as little as one business day. To qualify, the company says the taxpayer must meet "several requirements."

For taxpayers in a hurry, the best, most economical alternative to a refund anticipation loan is e-file from the IRS.  With IRS e-file, taxpayers get refunds in half the time it takes to file a paper tax return and receive a refund check. E-filers who choose direct deposit can receive their refund in as few as 10 days, according to the IRS.

In addition to the error checks built into return preparation software, additional checks are done during the transmission of software enabled e-file returns. These checks reduce the chance a taxpayer will receive an error letter from the IRS.

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