People are struggling and are in need of cash - and fast. Tax filing season is in full swing and so are the tax refund anticipation lenders. Tax refund anticipation loans (RALs) are marketed in such away to convince people not to wait for their tax refund and get their cash now. A very enticing proposition especially in our current economic environment. But RALs are susceptible to fraud and are extremely expensive. Most importantly, we are paying fees, which are sometimes very high, to borrow our own money. These RALs are insane and totally unnecessary.
We heard it before: "get your tax refund same day." RALs are high cost short-term cash advances of our own money. There are two big problems with these RALs:
- Some of these lenders are unscrupulous. They fail to disclose what the product is or fail to fully disclose the terms of the loan.
- These loans cost a lot of money for a short-term loan. Anywhere between 50% to 1300% annualized.
It typically takes the IRS 8-14 days to process a tax return and issue a refund particularly if a taxpayer uses
e-file and that is the typical term of a RAL - 8 to 14 days. A typical RAL for $3,000 may cost between $62 to $1,000. Some people may think that this is not a lot of money but they forget that they are being charged those fees for a loan/advance for 8-14 days and which is particularly risk-free to the lender. There RAL lenders are pretty much assured their money because a temporary account is set-up for the deposit of the tax refund.
RALs are totally unnecessary. There are things that people can do as an alternative:
- File electronically using e-file and be patient. On average it takes the IRS 8-14 days to process a tax refund.
- Adjust your tax withholdings with a Form W-4. This means that your paychecks will be bigger because less is being withheld for income taxes but tax refunds will be less or zero. Some people mistakenly believe that the tax refund is like an annual bonus. It is not. IRS is just refunding your money that the government used without paying you interest.
- Open a saving account at a local credit union. Deposit the extra money you get from each paycheck into the savings account that will earn interest so that you can purchase something or go on that planned cruise.
RALs are just another profit making financial product that targets unsuspecting and vulnerable people. If Congress and the IRS are not going to eliminate the RALs, let's do it ourselves by spreading the word that people should avoid RALs.
Cross posted @ RebelCapitalist