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Avoid Refund Anticipation Loans

[Feb 13, 2010.]


Many people who need a fast loan apply for refund anticipation loans (RAL) when filing their income taxes. In fact, about 10 million people received these loans in 2008, according to the New York Times. But in most cases, it's better to skip using these quick loans and wait a couple of weeks for your refund check from the government. Here's why.

Fast Loans Equal Unnecessary Fees

Why should you pay someone else to borrow your own money? That's exactly what happens when you get a refund anticipation loan.  The cost of borrowing money until a refund check arrives can range from $30 to $90, which is like paying an annual percentage rate (APR) of 60% to 700% and up, according to the National Consumer Law Center. That cost is on top of any fees paid for tax preparation and electronic filing.

The companies that offer such loans often aggressively target folks with low and moderate incomes who are desperate for money. While it may seem like a good idea to get one of these loans, it doesn't make sense to pay such fees when it generally doesn't take more than two weeks to receive a tax refund from the IRS.

Skip the Loan

The best way to avoid having a tax refund eaten up by unnecessary fees is to have the patience to wait for the check from the government. Consider the following tips to avoid losing money to these loans:

  • File tax returns electronically. E-file allows tax returns to be submitted securely and speeds up the amount of time before you receive a refund. About 90 million people used e-file in 2008, according to the Connecticut Better Business Bureau.

  • Provide a checking account number to make the refund process even faster with direct deposit. Generally, refunds are deposited in about 10 days or so.

  • Avoid using check cashers to cash tax refunds or refund anticipation loans. Check casher fees for this service average 3% and can go as high as 7%, according to the National Consumer Law Center.

  • Look for free tax filing services in the local community.

  • Avoid getting tax refund debit cards that have hidden fees, which can be as high as $20 per transaction. These cards also may limit how much money can be accessed at any one time, further robbing you of your cash.

Get Reliable Help

Tax filers should only work with tax preparers at reputable firms. Anytime it appears that a tax preparer is more interested in pushing refund anticipation loans or other products, it's best to avoid working with them and find a different firm.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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