Every tax season I see the same ads about getting your tax return as quickly as possible. There are ads on television. There are ads on every light post in town. Why are companies so helpful all of a sudden? Do people really understand the scam they are signing up for?
Refund anticipation loans
Each year customers flood the offices of tax preparers to file 1040s and 1040EZs. Many of these customers will have a refund coming to them and will be offered a “same day tax return” known as a Refund Anticipation Loan (RAL).
For years the government has been cracking down on companies that offer these services charging that they are predatory and falsely advertised. The argument is that companies offering RALs often target low-income families that may feel like they need the money as soon as possible and that companies are not making it clear that RALs are loans that have hefty fees. Customers are led to believe that the check they receive is the refund they are due from the IRS. Many times they don’t realize that what’s actually happening is the tax preparer is providing a loan to the customer, for a large fee, and when the money comes from the IRS it will go to the tax preparer.
Electronic deposits are fast
Customers don’t seem to be aware that the IRS will electronically deposit your refund into your credit union or bank account within two weeks of getting your return for free. Many customers say that they get the money in about eight business days.
Let’s say that you have a $1,500 refund coming. Your tax preparer tells you that you can leave with a check for $1,140 right now. It sounds great until you realize that you’re giving up $360. With a little bit of patience you could have the whole $1,500 in a little more than one week.
Always remember the PIL
Remember, this is a loan we are talking about. They are not helping you out, they are providing a service, for a fee. Every time you consider taking out a loan you need to know the Principle, Interest rate, and Length of the loan (PIL). In our example, the principle is $1,140, the interest rate is 24%, and the length of the loan is eight days. Does that sound like a good opportunity?
As you can tell, I’m not a big fan of same-day tax refunds. Regardless of if you choose to use them or not, it’s important to understand what same-day tax refunds are (refund anticipation loans) and what they are not (a nice service to make your life easier). Go into every decision with your eyes wide open.
Shay Olivarria is the most dynamic financial education speaker working today. She speaks at high schools, colleges, and companies across the country. She has written three books on personal finance, including Amazon Best Seller “Money Matters: The Get It Done in 1 Minute Workbook”. Shay has been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. To schedule Shay to speak at your event or to download her new eBook, visit www.BiggerThanYourBlock.com.