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Rapid Refund loans are a poor buy
When tax time comes around, most Americans are due a refund. The reason is simple - our withholding system usually causes more taxes to be withheld from paychecks than will actually be due on April 15. Anyone could adjust their withholding to insure that they had no refund due, but most Americans like receiving the refund. It has been pointed out many times that the refund isn’t a windfall; it is the Federal Government returning money that you have lent it all year at no interest.
Still, people like getting that check every spring, and most have it spent before it arrives. In order to cater to those who cannot receive their tax refund soon enough, the tax preparation industry has come up with a new product - the Refund Anticipation Loan. The RAL, also known as a Rapid Refund, is presented by the preparer as a way to get the refund sooner, usually in 24 hours. In exchange for the rapid refund, the consumer pays a great deal of interest disguised as a fee.
While this may seem like an OK idea, there are some problems with rapid refunds:
- The fees charged for the refunds vary widely, but nationally, they average about $100. This is not a cheap source of money.
- When considered on an annual basis, the interest rates (and it is interest) works out in some cases to more than 700% per year. This is even a higher rate than the interest rates charged for payday loans.
- Those who opt to take the rapid refunds are often those who can least afford them - the working poor. Half of all taxpayers who took out rapid refunds last year also filed for the Earned Income Tax Credit.
- You are paying the tax preparer to lend you your own money!
- Tax returns filed electronically generally yield a refund within two weeks, so you really aren’t getting your refund that much sooner.
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