This week we’ll return to our discussion on predatory lending and discuss refund anticipation loans and checks.
Refund anticipation loans are short-term cash advances made against an anticipated income tax refund. Tax filers are given a lump sum early and are asked to repay that loan, with interest and fees, once they receive their tax refund. These loans often have high fees and APRs above 100%, and borrowers may receive their money only a week or two before they receive their tax refunds.
As of April 2012, FDIC-insured banks are no longer allowed to offer refund anticipation loans, but less regulated financial institutions and certain tax preparation companies often can. Starting in 2013, many refund anticipation loans were replaced by refund anticipation checks.
Refund anticipation checks are temporary bank account set up for tax filers, where filers do not have to pay for their tax preparation and filing fees up front and instead pay those, along with a refund anticipation check fee, once they receive their tax return. These fees typically cost anywhere from $25 to $60, and along with excessive filing and tax preparation fees, can rob low-income tax filers of hundreds of dollars at tax time. Limited-resource households, as well as families who rely on the Earned Income Tax Credit (EITC), are particularly vulnerable to this predatory practice, many of which are eligible for free tax preparation and filing through VITA sites and other resources. For more information on VITA, be sure to visit irs.gov.
Next week we’ll return and discuss overdraft loans and rent-to-own contracts.