MOUNT VERNON — Taxpayers in need of cash, or those who suffer from impatience, can get their refund money quickly, but they may pay a high price for doing so.
Some tax preparation companies offer clients short-term loans secured by their anticipated tax refund. The firms work with a partner bank; the bank actually makes the loan for seven to 14 days, until the IRS refund repays it. The downside of such loans is the high interest rates and fees. Consumer advocates advise against taking out such loans, saying they hurt taxpayers, particularly poor and middle-income taxpayers.
The National Consumer Law Center found the effective annualized rate for a refund loan can range from about 50 percent to nearly 500 percent. Consumers took out more than 9 million refund loans in 2006, and paid more than $900 million in loan fees and $90 million in additional fees.
In Mount Vernon, those seeking a refund loan can visit a local Jackson Hewitt or H&R Block.
The local H&R Block district includes Mount Vernon, Coshocton, Newark. District Manager Bryant McGowan, said that, while the company offers refund loans, it generally does not recommend them and present clients with other options, starting with the least expensive option.
“The cheapest way and the one we recommend is to pay for your tax preparation in the office and let us electronically file it,” he said. “The IRS will send the check or use direct deposit.”
McGowan said the company recently lowered the interest rate to 36 percent for refund loans, adding that, typically, clients who receive refund loans need money for some immediate expense, such as a broken-down car or a rent payment. Others may only perceive that they need the money within 24 to 48 hours, the time in which clients generally receive a refund loan. He said that, in general, the number of refund loans made depends on the socioeconomic demographics of the area in question. There are generally more such loans made in the poorer rural or inner city areas around Coshocton, Cambridge, Cleveland and Columbus, and less in places like Mount Vernon and Heath.
McGowan said the company recommends a refund anticipation check over a refund loan. Both carry a $29.95 fee that goes to the partner bank, HSBC, plus the cost of the tax preparation service provided, which can vary. The advantage with the refund anticipation check is that clients do not have to pay anything when they come to have their taxes prepared. As with the regular tax preparation method, it will generally take between eight to 15 days for the client to receive a refund.
A client can receive a refund loan within about 24 to 48 hours, McGowan said.
There is another product, an instant refund anticipation loan, which allows the filer to leave the office with a partial payment, up to $500. The rest would come within 24 to 48 hours. If the client owes back taxes or child support payments, he added, the IRS will subtract this amount from the refund first, before the interest and fee goes to the bank and the tax preparation fee to H&R Block.
If a person receives the loan, McGowan said, and it turns out that they owe the IRS money, the client will owe the the bank the money. In such cases, H&R Block will not seek to recover tax preparation fees, and often works with clients so they pay the fee when they have their taxes prepared the following year, but the client will owe the bank. He said there is a greater risk of such “bad debt” taking place with the instant refund loan.
“We tend not to recommend this instant product unless the client really needs the money,” he said. “But when the client comes in with the intention of leaving with money, you’re not going to convince them otherwise.”
McGowan said offering the product is a business decision on the part of the firm, and, if customers can’t get the loans at H&R Block, they will go somewhere else, whether a branded competitor an unbranded payday lender. He said many people who get a refund loan are insensitive to the high interest rates these loans carry.
According to the National Consumer Law Center, H&R Block and JPMorgan Chase have lowered their tax refund loan fees, claiming these loans bear an effective interest rate of 36 percent, the traditional small loan rate cap in many states.
“Block and JPMorgan’s price reductions do represent a real and significant reduction in cost to consumers,” the NCLC release states. “A refund anticipation loan in the amount of $2,600, which is the average refund, costs from $57.85 to $110. Taxpayers should avoid them in first place, but if they insist on getting one, they should shop around.”
Critics of the loans include the Better Business Bureau and the Consumer Federation of American, as well as the Ohio Attorney General Marc Dann, who recently issued a statement condemning refund loans. He described firms that offer the loans as “dishonest income tax preparers” and compared them to “equally dishonest payday lenders” who use “scare tactics, inflate fees and take advantage of taxpayers who need their refunds immediately by charging high interest rates.”
“If you can wait two weeks for your money, you’ll save a lot of money,” Dann said in the statement.
The BBB reports that the interest rate is extremely high despite the low risk to the lender, and some companies further gouge consumers by tacking on administrative fees.
“For taxpayers who want to get their hands on their tax refund money right away, they need to keep in mind that an instant refund can come back to cost them more than it helps them,” said Steve Cox, BBB spokesman. “Refund anticipation loans are based on anticipated tax refunds and if consumers end up getting less money back than predicted, they will owe the money loaned and will incur hefty fees and fines if they don’t pay off the refund anticipation loan on time.”
A federal judge recently blocked key parts of a New Jersey law to limit interest rates and fees on tax refund loans. New Jersey is the second state, after Connecticut, to try to place a limit on how much consumers can be charged for refund anticipation loans. Ten other states have passed laws regulating refund anticipation loans to prevent abuses.
Dennis Ginty, spokesman for the Ohio Department of Commerce, said refund loans are not regulated by the department’s Division of Financial Institutions, and, to his knowledge, there is no state law that regulates such loans or limit the amount of interest rates associated with them.
