February 19, 2010
And so it begins. Tax season. The time of year when tax prep software commercials sandwich prime time TV shows and your friends in the tax prep industry sleep on office couches. For many like myself, it’s another opportunity to procrastinate for four months and then spend my entire refund on priority mail.
Unfortunately, this time of year is also notorious for coercion and scheming, and the latest trend is in refund anticipation loans (RALs). A tax preparer may advertise these loans as “instant loans” or “instant refunds” – in reality, the only instant thing about them is the speed with which your real refund will shrink.
Here’s how it works: your tax preparer offers you a RAL; you accept the offer and sign a document, which is essentially a loan agreement authorizing the preparer to use your refund as a guarantee, with interest rates as high as 50-500% a year; the loan is (instantly!) approved; you walk away with fast cash but actually receive a significantly smaller refund; and the tax preparer makes one hefty profit.
Certainly, the tax prep industry provides a highly-demanded service for many, many people. But according to the Woodstock Institute, 8.67 million taxpayers received RALs in 2007. A RAL may very well have been an appropriate solution for some of these individuals, but I will venture to guess that they comprise only a small portion of that 8.67 million. What about the millions who are essentially handing over their hard-earned money? I believe the answer lies in education and empowerment.
ACCION USA’s financial education team is on top of this. We have already distributed an article addressing RALs, and we are featuring RALs in our online tip of the month. In addition to educating clients on the implications of refund anticipation loans, we also provide them with valuable resources, including smart alternatives to RALs, lists of free tax preparation locations (including our Miami, FL office), and helpful websites. These resources not only have the power to produce more informed taxpayers; but they also have the potential to mold a new generation of educated, responsible, and empowered consumers.
This type of generational change may not be instant – but in terms of the return, the investment is surely worth the wait.
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