If someone offered to give you a loan for $2100 at interest rates of up to 222 percent you’d probably laugh at them and walk away; but, this spring, 1 in 10 Americans will do just that: for
privilege of borrowing their own money, over 12 million tax filers will pay interest rates as high as 744 percent to borrow their own money thru refund-anticipation or “rapid refund” loans.Refund anticipation loans are short term, high interest loans that commercial tax preparation services offer to taxpayers as a way for filers to get their tax refunds faster -- typically 1 to 2 days. The loans are secured by filer’s anticipated tax refund and ordinarily last no more than 10 days.
Refund anticipation loans are commonly called as predatory lending by consumer rights advocates who say that they cost working poor taxpayers over $500 million a year.
According to estimates by Consumer Federation of America and National Consumer Law Center, in 2004, a refund anticipation loan recipient would have paid about $250 to get a $2100 refund loan from a commercial tax preparation chain with interest rates of about 182 percent annual percentage rate (APR).
Consumer watchdogs believe that commercial tax preparation services that offer refund-anticipation loans are targeting low income taxpayers and Earned Income Tax Credit (EITC) recipients: IRS data shows that EITC recipients are 55 percent of refund-anticipation loan recipients.
“The EITC is meant to give a boost to hard-working, low-income Americans. Tax preparers and banks are eating away value of this program, taking money that could be otherwise used to pay bills or build a nest egg for a home or education,” stated Chi Chi Wu, NCLC staff attorney. The EITC program, nation’s largest anti-poverty program, was enacted in 1975 to help low wage workers. Recipients get a large percentage of their federal withholding refunded to them to help lift them out of poverty.
Why would someone pay such high interest rates to borrow their own money when IRS can return their money in as little as 10 days if they file electronically?
For many working poor, like Mary Carter, it’s all too common issue of needing money to make ends meet. Carter paid H&R Block $218 out of her $760 refund to get a Rapid Refund loan.
” I needed some money right away," said Mary Carter in an interview with Chicago Reporter. "I've always known it wasn't a good deal because that's too much…, but if you need money, all you see is that money coming back in a day or two that you can use right away.”
