Refund Loans Can Affect Tax Refunds

To most taxpayers who can't wait for a check to arrive from the federal government, refund anticipation loans may seem appealing, until they realize that the fees and high interest rate can drastically affect the amount they were expecting to receive.

Taxpayers should first find a way to even out their finances, and then file their taxes so they can get back what is due them.

Beginning in the last couple of years, taxpayers no longer had to wait until the end of January when they receive their W-2 forms to apply for refund anticipation loans. They can now simply take their December pay stubs to a tax preparer and receive a refund.

Consumer advocates believe that both types of loans are disadvantageous to low-income families because they are least able to afford the high fees and interest rates from their tax refunds and earned income tax credits.

According to Consumer Federal of America and the National Consumer Law Center, recent data has shown that in 2004 refund anticipation loans cost 12 million taxpayers $1 billion in loan fees, with pay stub loans most likely making a big contribution to the increase of that total.

Pay stub loans pose a risk for the working poor because, since tax time may be the only time they see a large amount of money, they fall prey to the idea of receiving cash sooner.

However, if the tax refund turns out to be less than you had anticipated, because of past-due child support or unpaid student loans, the filer will still be responsible for the entire amount of the loan. That, Wu said, is the disadvantage of not having a W-2 form.

Tax preparers ( believe that they are providing taxpayers a valuable service by making the loans available to them.

Having initiated pay stub loan last year, Jackson Hewitt Tax Service won over thousands of H&R Block and Liberty Tax Service customers.

H&R Block Vice President, Bernie Wilson, said that the company now has a service available for people who want their tax refund money quicker.

If a borrower opens a bank account with H&R Block and uses a debit card to access funds there is a 36 percent annual percentage rate, whereas if a borrower chooses a traditional paper process, there is a 60 percent rate. Wilson said that the loans cannot exceed more than half the expected refund, even though it's not directly secured by anticipated tax refunds.

Wilson said the intention was for low income families to deposit their money into an account so that they can start saving. He said similar accounts are also available to refund anticipation loan borrowers.

Liberty Tax Service Chief Executive, John Hewitt, thinks that refund anticipation loans and pay stub loans are most likely safer than historical alternatives, because not only did the alternative take a percentage of the refund, but they were expensive and illegal.

However, on the other hand, Hewitt shows some uneasiness in pay stub loans in that they cost Americans too much money, and there can be a disparity between the size of the loan and the refund.

Refund anticipation and pay stub loans are discouraged by consumer groups, as well as criticized for its strong marketing by advocacy groups.

According to Chris Keeley, program associate with the Neighborhood Economic Development Advocacy Project, expensive loans that begin way before tax season are designed for low-income taxpayers, and they are doing everything they can to make the public aware of its risks.

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