Refund Anticipation Loan

There are a number of retail tax preparation companies that advertise quick or even instant refunds. It’s a bogus offer. There is no way for you to get your refund in less than a week. What these outfits are selling is called a “Refund Anticipation Loan.”

The key word is loan. You are borrowing your expected refund from a bank. At the risk of insulting someone, let me repeat: you are borrowing, borrowing your refund.

The bank is accepting as collateral the claim for a refund on a prepared tax return on the logic that the IRS will be obligated to pay the refund. You sign paperwork giving the IRS permission to send your refund within two weeks to pay off the loan.

If for some reason, the IRS does not send the refund, you have a loan at exorbitant interest. I’ve seen rates anywhere from 36% to 400% on refund anticipation loans. These loans can be very dangerous.

The most common reason the IRS fails to send the refund to the bank is because there is a prior claim on the refund, usually child support, past due taxes, or student loans. Maybe the tax return was rejected by the IRS or there is some issue within the tax return which is delaying the refund.

The bank does not wait around. It expects the refund in two weeks and will start collection proceedings almost immediately if it doesn’t get it. Meanwhile, your loan is accruing interest at outrageous rates.

If you have a refund of thousands of dollars, not uncommon if the tax return includes earned income credit, the refund anticipation loan has the potential to eat you alive. Most people have already spent the money when they discover the refund is not forthcoming. Can you really afford the hit on your credit rating?

Some tax preparation companies sell these loans aggressively. States’ attorney generals regularly sue these companies for predatory lending practices. A reputable tax preparer will try to steer you away from a refund anticipation loan. You are also required to sign a document affirming that you fully understand the risks.

You are much better waiting patiently the eight to fifteen days it takes the IRS to process your return and send a direct deposit to your own bank. I cannot stress strongly enough the danger of refund anticipation loans. It is safer and cheaper to avoid them altogether.

But if you feel you need to borrow your refund, I recommend HR Block. There are about five places during the tax preparation process where the tax preparer will stop and tell you the dangers of a refund anticipation loan. The loan application says “LOAN” in three inch letters.

They will give you a hard copy handout that clearly explains the risks and potential costs. Because of these careful, ethical practices, predatory loan lawsuits against HR Block have failed for lack of evidence.

I do not know the current rates, but in the past HR Block’s loan rates stood 36% APR. Although 36% is too high in my opinion, nevertheless HR Block’s rates have typically been the cheapest in the industry.