refund anticipation loans

It’s almost tax time again.  Before the end of the month, you’ll receive W2s, 1099s, and other complex sounding forms from your employers, contract employers, banks, brokerage firms, and a lot of other companies you didn’t know you had relationships with.  Then you’ll have to wade through a 1040, Schedule A, Schedule C, countless other forms and worksheets, and software that may or may not be getting it right (how would you know?).

If you’re the kind of person who throws all this stuff in a file folder and takes it to a tax preparation agency, good for you.  The service will cost you a little bit, but what price is the peace of mind you’ll be buying.

There is one thing to be aware of though.  If you use a commercial tax preparation agency this year, and you discover you get a refund, you’ll almost certainly be offered a refund anticipation loan, or RAL.  An RAL sounds very attractive.  The tax preparation agency, for a small fee, gives you the amount of your refund – on the spot, in some cases.  No waiting!  Then when your refund arrives, the agency keeps it to pay back the loan.

The problem, of course, is the “small fee.”  The fee doesn’t seem like much, especially when it comes directly out of the loan and you don’t have to pay it out-of-pocket.  But when expressed as an annual percentage rate, the fee can be as high as 113%.  RALs are second only to payday loans in the World’s Worst Way to Borrow Money category.  Would you take out any other loan at that rate?  Probably not.  (And if you would – Hey, I have some money I’d like to lend you!)

And don’t forget, customers who e-file, which includes you if you use a tax preparation agency, can get their refunds from the IRS in as little as eleven days.  So not only are you paying a high rate to borrow money, you’re doing it just to get the money a couple weeks sooner.  So do yourself a favor and skip the refund anticipation loan this year.

This article originally appeared in the January 14, 2009, edition of the Greenhorn Valley View.

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