Personal Finance and Investing

As soon as tax season approaches the advertisements for Rapid Tax Refunds appear. They sound so simple up front: Get assistance filing a tax return online for a fee and the company will even loan you the money up front equal to the estimated refund. What a deal! Or is it?

It’s not much of a deal at all in the opinion of most state government officials charged with consumer protection. The loans being offered go under a variety of names including fast cash refunds or instant refunds. Officially they are referred to as refund anticipation loans (RALS).

The reason they are considered to be scams by most state Attorney Generals is because people desperate for cash end up paying 25 percent or more of their tax refund to the company offering RALS. An even worse scenario is when the actual refund is less than the expected refund and the consumer must pay the difference back to the loan originator. In those cases the consumer ends up owing the tax difference and the fees, often leaving very little in the way of net cash.

Like any scam these lenders tend to prey on people who need cash quickly or are unable to understand the loan terms. The lenders can be any one of a number of businesses. Common companies offering RALS include payday lenders, car title loan companies, car dealers, and tax preparers. The fees charged for “helping” consumers get their tax refund quickly include preparation fees and filing fees. Once the loan is issued, interest charges begin to accumulate.

The simple fact is that people can file their tax returns electronically for free and expect to see the refund within two weeks. In addition, taxpayers earning less than $49,000 a year can get free tax preparation assistance. In other words, consumers can get their tax refunds quickly without incurring a lot of fees and interest on loans.

Many deceptive practices are used to push the RALS. Consumers are often not given all the facts such as the fact the refund will go to the loan originator and not the consumer. Many people don’t realize they are actually agreeing to a loan and believe they are only agreeing to pay a fee to get help obtaining their tax refund sooner rather than later. It comes as a surprise when interest is charged on a loan and they never see the actual refund.

Another problem that arises is when the refund is delayed for any reason. The loan continues to earn interest until paid. Some lenders will actually charge additional fees when a refund arrives after a date established in the loan agreement. Fees can be high too and especially when expressed as a percentage of the refund amount.

Some states have already put constraints on the rapid refund businesses, but there plenty states that have no rules in place yet. Consumers should be aware that businesses offering rapid tax refunds and also offering to give cash equal to the refund net of some fees are actually offering expensive loans. As such, it’s important to approach the transaction with the same caution and analysis given any loan. That is the best way to avoid getting gouged through an RAL.

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