|
When you hear an offer for a loan with a 700% interest rate you probably expect the lender's office to be a dimly lit back ally and to use portions of your anatomy as collateral. You probably wouldn't expect the offer in a bright clean office and to use cash you were already entitled to as collateral. You probably wouldn't expect such an offer to be advertised on national network television either. Actually, that bright clean office is about the most common place for that loan to be offered, and, yes, it's also advertised on national network television. It's called the refund money loan, and it's one of the most abusive lending scams in existence.
The refund money loan, also called the instant money loan or rapid refund, promises a taxpayer the opportunity to get their tax refund check immediately, rather than wait for the government to send it to them. Tax preparers who offer this service stress the convenience and speed of how quickly a taxpayer receives their refund. One commercial for a refund money loan run by a major tax preparation company has an individual showing up to get his refund loan check while the commercial is still filming, while another has the refund check instantly appearing in the taxpayer's pocket. They rarely stress just how expensive the service really is.
Refund money loans typically don't charge a traditional interest rate, but instead charge a minimum processing free and a second fee based on the amount of the refund loan. Normally, such a fee would be considered an interest rate, but it isn't tied directly to the value of the loan, but instead to a value tier. For example, instead of charging a fee of 5% of every $1,000 of loan, there would be a single fee, such as $20, for all loans between $500 and $1,000, and another fee, such as $40, for all loans between $1,001 and $2,000. Also, by charging a flat fee instead of a traditional interest rate, the time element is removed. This format allows these loans to sidestep state usury laws.
The format also allows a usury level interest rate to seem fairly innocuous. They key to understanding this issue is factoring in the concept of time value of money. As an example, we'll use a refund money loan of $1,000, a processing fee of $10, and a loan fee of $39.95. At first glance the total fee is $49.95, or 4.995%, but that doesn't take time into consideration. Most preparers require filers taking instant money loans to also E-file. Not only does this incur another preparation fee for the taxpayer, but also reduces the time the refund can be expected to between 4 and 6 weeks. Even assuming the longer period of 6 weeks, that makes for an annualized interest rate of 152%. At an interest rate like that, it might just be better to take a cash advance on a credit card at 24%, and that's a comparatively tame example. On the more abusive side, assume a $200 refund, the same $10 processing fee, a $29.95 loan fee, and a refund period of only 4 weeks. The total amount is $39.95, or just shy of 20% of the loan, but when annualized, creates a 1,067% rate. In fact, it can become an even darker scenario if the government deems the refund to be a lower amount, either because of an improperly completed return or because of a difference in the application of a tax stance. In these situations the taxpayer has still received their refund loan, has paid the fee for such, and is required to pay the difference to the lender.
From one perspective, a taxpayer doesn't even want a tax refund. A tax refund means a taxpayer has overpaid their tax burden during the year and effectively given the government an interest free loan. Filing a tax return is a year-end reckoning with the government for each taxpayer's liability. It isn't like sending in a rebate coupon when you buy something at full price to get a discount. Any refund received is money that was already the taxpayer's in the first place, given to the government as wage withholding, quarterly payments or other withholdings. Each taxpayer's tax liability, with the exception of a minor possible change from an IRA contribution, is set at the end of the calendar year, and there's nothing that can actually be done to change that liability at the time a tax return is filed. A professional preparer may be able to find additional deductions, credits, or options at the time of filing the taxpayer was unaware would be beneficial. However, the same situations and purchases, which allow those deductions, credits and options, were already there by the end of the year. As such, with proper planning a taxpayer can pay the government exactly what he or she owes, and are required to pay throughout the year by law, and have the money that would otherwise be refunded to them earning them money in a bank account throughout the year.
It's obvious enough that it doesn't make any sense to pay an interest rate higher than a cash advance on a credit card just to get a tax refund faster. What isn't as obvious is how much sense it makes to pay someone who sells a service this financially unsound to prepare your tax return. This question takes on extra weight when that person is someone you're trusting to give you sound advice on how to minimize your tax burden, particularly when it can be considered financially unsound to receive a tax refund at all. This isn't to say that it's necessarily bad to receive a tax refund, but that it might be better to concentrate on planning to allow a taxpayer to keep their money in the first place than offering a usurious loan to get their refund quickly.
|
|
