Why You Should Be Wary of Refund Anticipation Loans

For many people, the tax refund simply cannot arrive soon enough, and there are plenty of tax anticipation loan offers out there luring you with the promise of easy money. That promise of ready cash can be quite appealing, especially after the holidays, when many people find themselves in debt and looking for a way out.

Before you take out one of these refund anticipation loans, however, it is important to read the fine print, and to calculate the true cost of that seemingly endless money.

Many people are simply shocked at the amount of the tax refund that ends up being eaten up by interest and fees. In some cases, as much as 80-90% of the anticipated refund is gone by the time all the fees are paid.

The fact is that many so-called refund anticipation loans are third party loans, meaning that the bank fees and other charges are tacked on to the fees charged by the tax preparer for electronic filing and standard tax preparation. In one typical case, $500 of an anticipated $4,000 refund was eaten up by such fees and charges.

These refund anticipation loans are certainly popular, however, and there is no shortage of firms pushing such loans. Nearly one in 10 taxpayers chooses the option of a refund anticipation loan, and many of them are unaware of the high fees involved with such loans.

Some consumer watchdog organizations have begun to take a look at these fees, and many accuse the tax preparation and lending industry of targeting those least able to afford high fees. Indeed, those who find themselves taking advantage of refund anticipation loans year after year are often the working poor. Those taxpayers often feel trapped into such loans, but it is important for all taxpayers to examine all the options before taking out such a costly loan option.

Anyone considering a refund anticipation loan or similar offer should be sure to read all the fine print on the loan paperwork. It is important to know exactly what fees are involved, and to calculate the interest rate being charged on the loan. After examining all the fees and expenses you just may decide to wait on the IRS. With electronic filing speeding the average processing time for refunds, the refund anticipation loan may be less valuable than you think.

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