If you’ve got an income tax refund coming your way, you can easily avoid wasting money to access those funds.
You should benefit from your refund, not a check cashing or quickie refund outfit.
Clearpoint’s credit counselors tell consumers what to watch for and how they can avoid wasting money to get access to your refund.
Tax refunds that will cost you mightily
The effective annual percentage rate of interest (APR) on a refund anticipation loan (RAL) can range between 40% and 700%, depending on the amount borrowed. Lower amounts borrowed cost more in interest.
Faster cash means more fees. Same day loan payout options come with fees ranging from an extra $20 to $30.
In recent years, estimates show that the average tax refund loan is $2,150, at a cost of $100 to the borrower. That equals an interest rate of 178% APR!
Recent I.R.S. data estimates that 7 million working poor families (those qualifying for the Earned Income Tax Credit) spent over $900 million in fees in order to get their tax refund money. Since many of them are unbanked, about 45% of these borrowers spent $205 million in fees to cash their RAL checks at check cashing services.
If the taxpayer cannot pay back the loan with a refund, the amount owed will go straight to debt collection and can ruin their credit. Additional penalty fees and collection charges are also added, making it difficult to repay.
Better alternatives for fast refunds
People who typically get large I.R.S. tax refunds should consider making adjustments to their W-4 form so they can put that refund back into their monthly income, instead of waiting 12 months.
Better technology and secure online filing makes it possible for refunds from the I.R.S. to be processed as quickly as 7 days for people who e-file and have refunds routed straight to their bank account.
Those without bank accounts can sign up for a program with the I.R.S. or tax paying service that will load their refund on to a special prepaid card. These cards are specially designated for this purpose, and don’t come with the typical high maintenance fees of other pre-paid cards.
Free tax preparation assistance for low-income filers is available through Volunteer Income Tax Assistance (VITA). To qualify, consumers should visit www.irs.gov or call 800-906-9887. Some VITA sites also offer assistance with low-cost pre-paid cards and opening bank accounts.
Those who don’t need assistance filing may still qualify for free tax return processing by visiting the IRS website.