Doing a Tax Refund Loan? Ask Yourself This 1 Question

by Darwin on March 24, 2010

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!

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1 Budgeting in the Fun Stuff March 24, 2010 at 9:03 am

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”.

Darwin Reply:

@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.

2 ctreit March 24, 2010 at 9:13 am

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.

3 Crystal March 24, 2010 at 1:53 pm

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.

Darwin Reply:

@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.

4 kt March 24, 2010 at 1:56 pm

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

Darwin Reply:

@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.

5 Smarter Spend March 26, 2010 at 3:53 am

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.

6 Stay at Home Mom CFO March 26, 2010 at 5:43 pm

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?

7 Beth December 5, 2010 at 5:56 am

OK, I understand your “Hurry up I need money Tax Loan Advice”, can you advise me on this. Past COO and VP of Sales that was force to use my early retirement due to serious and chronic health problems that left me disabled. I had little choice other than suicide. The story is personal, now I was COO not CFO and I have also suffered memory and emotional/psychological disabilities associated with these diseases, so if you can help me I would be extremely thankful. I am pending tax refunds (ammended taxes for 2005 – 2007), thankfully I had a judge that took the time to review my work history, work ethics, as well as my health. I have had situations including theft and the unexpected passing of a family member. I paid 57.00, each, to obtain IRS copies of 2005, 2006 and 2007 copies of my returns, sent this via overnight and do have confirmation it was received OVER A MONTH AGO. I will still need to review these with my tax/accountant person and then finally file the ammendments.

I have bills, old bills (did not declare bankruptcy), have loss nearly everything waiting on disability, my son just lost his father, I really would like to have some level of stress relief now, not to mention a basic need for the most meagor of Christmas hopes (a tree a gift for my son).

My credit score has gone from 748 in 2005 to probably 450 now. Is there a loan available that I can show good faith in paying back due to my pending situation with my taxes?

I so appreciate any advice you can offer.



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