Is It a Good Idea to Utilize a Rapid Refund Loan To Get My Tax Refund Sooner?

Beware this Taxpayer Rip-off. Rapid Refund loans are a terrible idea!

If someone offered to take part of your paycheck each pay period and hold it for you until the end of the year, then charge you a fee of up to 2000% (yes, two thousand percent) to get it back, you'd probably laugh them out of town. Yet if you've ever taken a pay day loan or tax refund loan, that's exactly what you've done.

Tax refund loans, also called "instant refund loans," or "refund anticipation loans," target lower income Americans, but people in middle income brackets also fall for this gambit. For a loan fee ranging from $29.95 to $89.95 plus electronic filing fees of $40, you receive a loan for the amount of your refund (usually up to $5,000) within one to two days. When your refund is received in a special bank account set up by the lender, the loan is repaid.

The fees for the average refund of just under $2,000 equate to an annual percentage rate of 222.5%. Some taxpayers pay the equivalent of a rate of over 2000%, according to the Consumer Federation of America and the National Consumer Law Center. Yet 12 million taxpayers paid over $900 million dollars in fees last year just to get their refunds a little faster.

If you're in such dire financial straits that you would consider paying such an exorbitant fee to receive your income tax refund a week or two earlier, you should know that there are no-cost or low-cost methods of achieving the same result.

The most obvious alternative is to reduce your income tax withholding by filing a new form W-4 with your employer and claiming more withholding allowances. If you find it difficult to save money once you have it in your hands and you use over withholding of your taxes as a type of enforced savings, why not have money automatically deducted from your check and deposited into a savings account each pay period?

Even if you prefer to have Uncle Sam hold your money hostage until the end of the year by over withholding, there are simple ways to get your money quickly without being a victim of highway robbery. Filing electronically speeds up your refund and need not cost you much. Electronic filers who have their refund deposited directly into their bank account can receive their refund within ten days of filing. If you're one of the millions of Americans who don't have a bank account, you'll have to wait a bit longer to receive your check in the mail.

The IRS instituted a new program for tax year 2002 that allows millions of Americans (60% of all Americans) to have their tax return prepared and filed electronically at no cost. Seventeen companies provide these services through an alliance with the IRS. Eligibility varies from one company to the other but is based on factors such as age, adjusted gross income, and in some cases state of residence. For information on the new "Free File" program, visit the Free File section of the IRS Web site. Choose one of the listed vendors whose eligibility requirements meet your situation.

When you use these free tax filing services, you'll see prominently displayed ads for refund loans. If you're tempted, remember that you'd be paying the equivalent of an interest rate percentage in the hundreds or even thousands. Unless ten days or so will make the difference between losing your home to foreclosure or something equally as drastic, try not to fall for these outrageous offers.

Beware, not all bandits wear masks!