Can't wait for a refund? Refund Anticipation Loans will cost you

By Tom Tennant

You've got bills to pay and a creditor or two reminding you that you're a couple weeks behind on your payment. Maybe your car is in desperate need of repair. Or, heck, could be that vacation is around the corner and you'd like some extra "walkin' around" money.

No matter the reason, the promise of quick cash by way of an "instant tax refund" is pretty darn alluring. The problem is, that fast federal tax refund isn't a refund at all. It's a loan - and an ultra-expensive one at that.

We're talking tax preparation fees, interest rates that could soar into the triple digits, and the possibility that your refund will be less than your loan amount.

Which begs the question, if you can file your taxes electronically, possibly for free and with help from local non-profit groups and the IRS, and then have Uncle Sam direct deposit your refund straight into your checking account in under two weeks, why give so much of that refund away to get cash in your pocket the same day?

It just doesn't make sense.

Government intervention in Refund Anticipation Loans

Consider, too, that the government is so down on these types of loans it won't even allow businesses to call the loans "instant tax refunds" anymore. Which is good, since they're not refunds at all. They're now called Refund Anticipation Loans, or RALs. And in 17 states RALs are highly regulated to protect consumers.

Starting this year, the IRS won't tell tax preparers and financial institutions whether a person's refund could be garnished for unpaid taxes or child support. This makes underwriting the loan risky for lenders, because they're taking a chance that refund will come through and the borrower will pay back the loan.

Lenders responded by lowering the amount you can borrow to about $1,500 and jacking up the interest rate on the loan to anywhere from 50 percent to - get this - 500 percent. Yes, you read that right: 500 percent. This, according to the Center for Responsible Lending.

To get an RAL, you often visit a tax preparer who charges you $50 or so to prepare your taxes and then works with a bank to lend you the refund. Pay the tax preparer's fees with your refund, and that'll cost you a little extra, too.

Then there's the off chance that your refund amount will be less than the amount your tax preparer "anticipated." Or that a snafu holds up your refund for a short period of time. Or the IRS denies your refund altogether.

No matter the reason, you're still responsible for paying the loan in full. And if you can't … ouch. That's going to cost you.

The more you know, the less you spend

But if, after all that, you still want to pursue an RAL, the City of Chicago suggests you ask for this info in writing from your tax preparer:

• Fees that the preparer charges for tax preparation
• Fees that the prepares charges for facilitating the RAL
• The RAL's Annual Percentage Rate (APR)
• The RAL's total cost
• The estimated date the consumer can obtain their RAL money

If the tax preparer balks, go elsewhere. No matter how good the deal sounds. They could be up to no good.

Remember, if you are pursuing an RAL just to pay down some bills, you could be making things worse. Before you take out another high interest loan, talk to your creditors to see if they'll give you an extension. Most creditors will work with you, if you're not too far behind. Wait for your full refund and pay down even more.

And look into free tax prep help by visiting www.irs.gov or calling (312)-566-4912.