Would you take out a loan with an interest rate of 50 percent? How about 500 percent? It sounds ridiculous, but it's a common practice during tax filing time. Tax preparers around the country have offered refund anticipation loans, meaning they'll advance you the money that you're going to collect from Uncle Sam.
But these skeevy loans, which have historically targeted low-income communities, are dead, according to Karen Harris at the Sargent Shriver National Center on Poverty Law.
Thanks to a settlement between the Federal Deposit Insurance Corporation and Republic Bank Corp., the bank won't be offering these types of loans anymore. After the federal agency sent a cease-and-desist order to Republic last year, the other large banks also decided to stop issuing the loans.
How does a refund anticipation loan work? When you see those signs that say, "Instant tax refund," or "Get your refund today," it's likely that a company is trying to sell a loan that cuts the waiting time for your tax return. What these tax preparers often neglected to tell consumers was that they would be taking a big chunk of those refunds to cover the interest charged in exchange for making the loan. Republic Bank Corp., for example, charged $90 for a $1,500 loan. If you really needed the money, it might have made sense to do that in the old days, when tax refunds took weeks to receive. But these days if you file electronically, it's only about 10 days. So does it make sense to pay someone for your own money? Not so much.
According to a 2011 study by the Urban Institute, getting your taxes done and receiving "instant" cash can eat up as much 12 percent of a person's refund. The prince of tax preparation usually ranges from $187 to $350, the study found. Additional fees can vary from $57 to $117--or more for an instant refund.
The most troubling part of the anticipation loans was how they targeted poor communities. According to a report by the U.S. Treasury Department, nearly half were paid out in just 10 percent of the nation’s ZIP codes. Most of those who received them were the working poor, with a median adjusted gross income at less than $20,000. In addition, minorities were much more likely to use these services--13 percent of the people who took these loans were African Americans, 9 percent were Hispanics and 6 percent were white--the Urban Institute found.
But if you're looking for people who need money fast and maybe don't have the financial or literacy skills to figure out that they're getting a raw deal, poor communities have been an easy target. Thankfully, that won't be the case anymore.
However, the Shriver Center notes that tax preparers can still offer refund anticipation checks. Under those deals, a servicer sets up a temporary bank account with the refund money in it. Consumer spend the money via a debit card. It's less costly but still not the best deal because there are fees written into the agreements. Low-income consumers would be better served to take advantage of the many sites around the city that offer free or low-cost tax preparation, like the Center for Economic Progress. City residents can also dial 311 for information on free tax preparation sites near them.
If low-income families receive tax refunds, often times, that money is from the Earned Income Tax Credit Program, a tax credit that helps working families. Those refunds help struggling families and help the economy. It's good to know that less of this money will go toward ridiculously high interest fees and more toward giving poor families and neighborhoods a leg-up in the new year.
Photo credit: Taxbrackets.org
© Community Renewal Society 2011