Have you or would you ever take out a Payday Loan?
You know, those loans that charge exorbitant interest rates to desperate people that can’t wait for their next “payday” so they need the loan today?
If you answer no, then Why On Earth would you fall for a Tax Refund Loans or “Refund Anticipation Loan“? Perhaps you haven’t read the fine print or fully considered the rates you’re paying.
If the answer is yes, then you’re probably already familiar with these loans as well.
Basically, if you’re a taxpayer who’s getting a decent sized tax refund this year (and no, You Don’t Go to Finance Hell for Getting a Big Refund), many of the generic tax preparation services will offer you one of these trainwrecks of an option. In exchange for waiting a couple weeks for your refund to come in the conventional fashion from the IRS, in order to get those paws on your refund today, you have the luxury of paying interest rates that can range from 50% to over 500% annualized for that sense of instant gratification. (source: Baltimore Sun). According to the article, consumers paid $800 Million in fees for these loans in 2008. Almost a Billion Dollars…
With the highest online savings rate paying 1-2%, and even the worst credit card interest rates in the 20′s, why you you borrow at a rate 5-25 times worse than a high interest credit card? Oh, it’s “only” a hundred bucks. That’s one hundred dollars! Invest it if you don’t need it!
Now, I don’t mean to insult anyone that’s done this before and hadn’t considered the implications. Darwin will be disappointed though, if you go out and do this after you’ve done the math now that you’re informed. Have some patience and try planning instead of throwing away your money. This isn’t a debate over how much to tip your waiter or whether or not you think buying a new 3D television as an early adopter is worth the cost. This is quite simply an exercise in paying for convenience a rate that is illegal in virtually every state in any other setting – other than at tax time.
Better yet, instead of waiting until April 14th to do your taxes and request one of these loans, take the 5 minutes and start your taxes now and file them this weekend yourself. I’ve always preferred TurboTax over TaxCut and the other online services in years I do my taxes. You’ll have your refund before you know it!
Related posts:
- 6 Reasons You Won’t Go to Finance Hell if You’re Getting a Tax Refund This Year
- 401K Loan Rules – Taxes, Interest, Pros and Cons
- Mortgage Rates Dip Below Key 5% Level – How to Get Yours Even Lower
- Why Pay High Credit Card Interest Rates with Low Rate Alternatives Out There?
- USDA Home Loan Program – The 0% Down Bonanza You’ve Never Heard About
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{ 6 comments… read them below or add one }
I didn’t know these loans even existed…wow. Just what we need, more ways to give up money for hardly any benefit at all…
Even if I really needed the money, like my life was on the line, I’d put the purchase on my credit card and pay it off with my tax check. I mean, it only takes waiting a couple of weeks to get our refund (if we even get one) directly deposited into our bank account anyway.
As with credit card debt, “just say no”.
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Darwin Reply:
March 24th, 2010 at 5:41 pm
@Budgeting in the Fun Stuff, Good point. While taking on credit card debt has its own drawbacks, if you pay monthly (like people that take out payday loans assume they will when they sign on the dotted line), credit card would be a more prudent choice than a high interest loan – assuming the discipline and means exist to immediately pay that cc in full.
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I have recently read about these tax refund loans. I was thinking then that finance guys and gals are very resourceful when it comes to bilking customers out of money. While I can see why somebody would take out a payday loan, I don’t understand why somebody would take a tax refund loan.
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I know why! (my brother does it every year)
People do not think of their tax refund as ‘real’ $, they view it as a windfall from some long lost crazy uncle so paying an extra $200 ‘fake’ money so that they can get $600 ‘real’ money RIGHT THIS VERY INSTANT does not faze them.
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Darwin Reply:
March 24th, 2010 at 5:40 pm
@Crystal, That’s right. People don’t always treat money equally. Money is fungible and whether it’s a paycheck, a windfall, a tax return or a $20 bill you found in your pocket, it should be treated similarly.
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my answer to the above question about payday loans is no. infact i have never had to take out a loan from a financial institution
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Darwin Reply:
March 24th, 2010 at 5:39 pm
@kt, Low interest debt for something like a home = fine. 100% interest debt so you don’t have to wait 2 weeks = immature and bad. I’m not against all forms of debt, but if comes with horrible terms, avoid at all costs.
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Tax loans are a legal equivalent of a scam. The public should be informed about how unfair these loans are and how much money they are wasting- its the equivalent of taking money and burning it in a fire.
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I feel these are such a scam and do ultimately prey on the most desperate and vulnerable. I’ve heard a lot of people who don’t have bank accounts (read: poor) use them because otherwise they would need to wait 8-10 weeks for the paper check in the mail. That temptation, if you are poor and struggling, must be so great hence the profits for these “loans” are so large. Unlike payday loans (ie someone loses their job) is it even a “loan” if there is no liability of loss for the lender? How do these loans get paid back?
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