Beware Tax Refund Advance Loans

Tax refund advance loans, also known as tax refund anticipation loans, are commonly pitched as a way for taxpayers to gain access to their tax refund immediately rather than having to wait on the IRS.  Sound too good to be true?  It is.

Tax Refund Advance Loans Are Rip-offs

A tax refund advance loan falls into the same category as a payday loan, in my opinion.  Tax refund loans generally carry onerous fees (the average being $32 in 2004 according to Wikipedia) and hefty interest rates, often reaching 100% or more!  Opponents of tax refund advance loans claim that the lower-income, non-college-educated taxpayers who are the target for these types of loans don’t understand how high a rate of interest they are being charged.  Some opponents even argue that many who take out these tax refund advance loans aren’t even aware they are taking out a loan at all.  While I probably wouldn’t go that far, I do believe most of these loans are predatory in nature.

Supporters argue such high rates of interest are justified due to the high risk inherent in such loans.  I don’t buy that argument.  The IRS is pretty reliable and it’s unlikely they’d default, after all.  Sure, it’s possible the IRS may detect an error in the return resulting in a smaller refund than anticipated.  It’s also possible the taxpayer owes back taxes, meaning all or part of the refund would go towards paying off old tax debt.  But I highly, highly doubt a large percentage of these loans either default or turn out to be significantly lower than anticipated.  The fact that tax refund anticipation loans are so incredibly profitable leads credence to this theory.  I would love to see some statistics on this, but I don’t think I’ll be proven wrong.

Tax Refunds Don’t Even Take That Long!

The argument for tax refund advances has gotten much weaker the last several years.  It has never taken more than 2 weeks for me to get my tax refund from the IRS, and usually it’s less.  Ditto for my state tax refunds.  Even allowing for paper check refunds taking somewhat longer, we’re still only looking at about 3 weeks.  That’s really not too long to wait.  Okay sure, so maybe occasionally a low-income taxpayer may face a true emergency (medical or otherwise) and absolutely needs the cash immediately.  Fine, I’ll grant you in that one specific circumstance, a tax refund advance loan may be a valid option.  But that accounts for only a few of the estimated 12 million tax refund anticipation loans taken out in 2004.