Don't Pay to Borrow Your Own Money: The "Tax Refund" That is Really a Loan

How would you like to pay a super-high price to borrow money that already belongs to you? Sounds ridiculous, right?  But that's pretty much what happens to many folks at tax time in the crazy world of RALs (Refund Anticipation Loans). 

You may be tempted by tax-time advertisements for "Fast Cash Refunds," "Express Money," or "Instant Refunds." These ads offer to get you your refund in just a day or two, or even on the spot.  Beware! 

Many of these "fast refunds" are really LOANS, - refund anticipation loans(RAL).  When you get a RAL, you are borrowing against your own tax refund money. And RALs are often marketed to people who need money the most - low- and moderate-income workers who receive the Earned Income Tax Credit.

RALs are extremely expensive. Loan fees typically range from $30 to $90, which translates into Annual Percentage Rates (APRs) of about 60% to over 700%.

If you paid those rates on all your borrowing, you would probably go broke! And all to get your tax refund just a few days earlier than you can for free from the IRS. You are lining someone else's pockets with YOUR hard-earned money! 

RAL fees, combined with tax preparation, electronic filing, and other fees, can end up eating away a big chunk of your refund.

In addition to their high costs, RALs can be risky. Since a RAL is a loan from a bank in partnership with a tax preparer, it must be repaid even if the IRS denies or delays your refund, or your refund is smaller than expected.

If you do not pay back the RAL, the lender will take actions to hurt your credit rating and may send your account to a debt collector. In addition, when you apply for a RAL, you are giving the lender the right to grab your tax refund to pay for old tax loan debts that the lender claims you owe.

Here are ways to take a pass on that RAL -most folks don't need one - and save money at tax time:

· E-File with Direct Deposit. File your tax return electronically (E-file) to speed up your refund. Tell the IRS to deposit the refund directly into your bank account -you provide your account number right on your tax return. You can get a refund within two weeks this way - without paying one cent extra for a loan.

The Decatur County Family Connection Volunteers in Tax Assistance (VITA) Program can complete and file tax returns electronically at no charge for most families making less than $39,000 or individuals making less than $15,000.

· Get a bank account. If you do not have a bank account, open one up to take advantage of direct deposit. You can use a savings account to receive your tax refund, and maybe save some of it for a down payment on a house or a car, or to build a nest egg.

· Wait just a bit longer. Do you really have to get cash from your tax refund today?  Can you wait a few weeks to save almost $100 or more? If you have an urgent bill to pay, ask for more time until the tax refund check comes from the IRS. Don't take on a new expensive debt to pay an old bill.

· Avoid check cashers. Check cashers charge an extra fee to cash RAL and tax refund checks. Some check cashers charge up to 7% to cash a RAL check - the average is about 3%. So if you receive a $2,000 refund, it would cost you an average of $60 to cash the RAL check - on top of the RAL and tax preparation fees. A smarter move is to use a bank account.

· Save money and avoid RALs -Use a VITA Site.  A great way to save money at tax time is to go to a Volunteer Income Tax Assistance (VITA) site. VITA sites provide free tax preparation to low- and moderate-income taxpayers. VITA sites are sponsored by IRS. 

The Decatur County Family Connection VITA site will begin operation at the Bainbridge Library at 301 Monroe Street on Thursday, January 29 and will operate every Thursday from 3:30 p.m. to 6:30 p.m. (except March 19) until April 9 and by appointment on the first Saturday in February, March, and April from 10 to 1. 

Most families with incomes less than $39,000 and individuals with incomes less than $15,000 will qualify.

For more information on the Decatur County Family Connection VITA program, contact Site Coordinator Ami Mejia at 243-6451.