High-Cost Loans Often Disguised as Rapid Refunds
Low-income taxpayers, attracted by the promise of fast cash, are being lured into transactions that could drastically cut into their tax-refund checks, consumer advocates say.
At issue is the practice of coupling refund anticipation loans--high-interest, short-term loans secured by income tax refunds--with high-cost, check-cashing services. The combination--available at many locations of tax preparer H&R; Block Inc.--is popular with taxpayers who want to get their tax refund quickly. But consumer advocates say that convenience comes at a high price.
“H&R; Block markets itself as ‘America’s most trusted tax partner,’ but it is encouraging its customers to use high-cost services,” said Shelly Curran, a policy analyst with Consumers Union in San Francisco. “As a national leader in the tax preparation business, H&R; Block has a responsibility to set a higher standard for the industry.”
The annual percentage rate on refund loans is 67% to 774%, depending on the size of the refund--much more costly than even the highest-rate credit card loan, said Chi Chi Wu, staff attorney with the National Consumer Law Center in Boston. Yet the loan is secured by a tax refund from the U.S. Treasury, so the lender’s risk is virtually nil.
What’s more, the purpose of the loans is to get refunds into taxpayers’ hands within two days if the return is filed electronically. That saves time, but not much. The IRS promises to mail refund checks--or directly deposit them to taxpayer accounts--within two weeks of receiving an e-filed return. (Almost all refund loans are made to taxpayers who file electronically, mainly because most tax preparation firms won’t make refund loans on paper returns, which take longer to process and are far more likely to contain errors.)
H&R; Block’s deal with Ace Cash Express Inc. to place check-cashing machines in 9,000 H&R; Block tax preparation offices nationwide is drawing fire from consumer advocates. The machines allow taxpayers who may not have access to a checking account to immediately cash their refund-loan checks--for a 3% fee.
Between tax preparation fees, electronic-filing fees, refund-loan fees and check-cashing fees, a consumer who expected a $1,600 tax refund could see almost 17% of that amount--$267--wiped away, Wu said.
H&R; Block said that although consumer groups are critical of the costs, consumers continue to clamor for the loans.
“We offer them because some of our clients have demanded them,” said Denise Sposato, spokeswoman for H&R; Block. “Until the IRS can get refunds delivered in two or three days, some of our clients will want to get their money faster.”
H&R; Block isn’t alone in offering refund loans. Intuit Inc. offers the loans, as do other tax preparers, which generally make the loans in partnership with banks such as Household Bank and Bank One Corp., according to Bloomberg News. A January report by the National Consumer Law Center showed that about 10.8 million of the approximately 92million individual refund recipients take out refund loans each year.
Nor are the fees charged by the Kansas City, Mo.-based H&R; Block particularly unusual. The Consumer Law Center estimated Americans spend more than $800 million a year on refund loans.
Consumer advocates say tax refund loans are disproportionately popular among low-income consumers. About 4.3 million of the loans are obtained by people who also claim the earned income tax credit, a tax break for the working poor. These individuals are arguably the least able to afford high-cost tax services.
Why do they do it? The National Consumer Law Center found that a significant portion of low-income filers needed the refund loan to pay tax preparation fees, Wu said.
Most of these fees are easily avoided. Low-income taxpayers can visit Volunteer Income Tax Assistance Centers to have their returns prepared for free. The IRS provides lists of these centers, which set up on college campuses, senior centers and nonprofit groups during tax season, on its Web site at www.irs.gov. Or they can call the IRS help line at (800) 829-1040.
The popularity of the loans may diminish as the IRS improves its computer systems. When the new system goes on line, taxpayers who e-file will be able to get refunds in two or three days.
In the meantime, consumer advocates urge taxpayers to consider all their options before agreeing to a high-cost, short-term loan.
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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit The Times’ Web site at www.latimes.com/perfin.
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A Taxing Proposition
Loans taken out in anticipation of federal income tax refunds aren’t a smart deal for low-income workers, consumer advocates say, especially when coupled with check-cashing and tax-preparation services the taxpayer may not need. Here’s how these fees can add up, based on a $1,600 refund:
Cost to
Type of fee taxpayer
Refund loan $75
Electronic filing 40
Check cashing 67
Tax preparation 85
Total fees $267
Taxpayer receives $1,333 from $1,600 refund.
Source: National Consumer Law Center
