Rapid Refund or Rapid Rip-Off?

It's nearly tax time again, and right on cue those familiar commercials offering consumers the opportunity to "Get Money Fast" through rapid tax refund services are clogging the airwaves.

While fast money seems like a no-lose situation to most of us, further evaluation of these popular programs raises some worrisome issues that beg the question, "Are we getting rich quick or just getting jacked quick?"

A recent study by the Consumer Federation of America and the National Consumer Law Center revealed that these rapid refunds, or Refund Anticipatory Loans (RAL) as they're formally called, are actually not refunds at all, but short-term loans which are only secured by an anticipated tax refund.

This means that if you don't receive your anticipated refund -- for reasons such as unpaid student loans and child support or even if your tax preparer made a mistake -- you'll be responsible for paying the loan back in full.

Additionally, unlike a refund where all the money belongs to you, a loan is subject to interest charges. When it comes to these particular loans, RAL providers such as H&R Block and Jackson Hewitt are charging consumers extremely inflated interest rates varying from 65% to 774%. Yikes!

Adding more insult to injury, the report also found that RAL providers prey on low- to middle-income consumers who are least able to afford the expensive triple-digit interest rates but most in need of the extra cash.

For recipients of an Earned Income Tax Credit, a government subsidy reserved for low-income individuals and families and paid out as a tax return, the high fees and interest rates and fees associated with RAL's can eat up most of the relief payment. In 2000, Earned Income Tax Credit recipients made up 40% of all rapid refund loan customers.

Ultimately, what makes these rapid refund loans so dangerous to consumers is the fact that most people aren't even aware that "rapid refunds" are loans. They aren't aware of the high interest rates they're getting charged and they're also not aware of the risks posed by these loans, such as damaged credit ratings and harassing calls from creditors. So, before you sign on the dotted line for any "rapid refund," be informed and check the facts.

Here are some ways you can protect yourself.

Be aware that rapid refunds are loans and figure out what your obligations are if your refund is refused by the government for any reason. Banks have been accused for years of misleading consumers about loan transactions. By quoting interest rates based on a yearly payback period instead of the real 10-day payback period of the loan, RAL providers understate the real interest rates of the loans. In the past, H&R Block training manuals have instructed staff not to provide complete information to loan customers. Agents were only encouraged to tell the customer information like when the check would be ready, the amount of fees and whether or not the fees would be withheld from the check.

Look out for hidden fees; the government does not require that tax preparers disclose all fees associated with RAL's, only the fact that a rapid refund is a loan. A Cleveland-based job training and placement program reported a client who was charged $100 to activate a cash card linked to an account containing his tax refund, and $29 every time he used it. Since the consumer could only withdraw $400 from the tax refund account at a time, he had to pay $29 repeatedly to gain access to his refund. Here are some more common hidden fees associated with RAL's:

Commercial tax preparer fee: $60-$300

Electronic filing fee: $40 average but based on sliding scale depending on refund amount

Loan fees: range from $29-$89 but can be up to half of the refund amount

Double fees: Check-cashing fee for refund check even though real tax return funds are deposited into a temporary bank account in the taxpayer's name

If you don't already have one, open a bank account to avoid increased check cashing fees for tax refunds. The ACE Cash Express check-cashing chain, for example, charges almost twice as much to cash a refund check than a regular paycheck. Additionally there is a $3 one-time "membership fee" for all tax refund and RAL checks.

Seek out free tax help services sponsored by the government and file electronically. The IRS's Volunteer Income Tax Assistance program has offices in major U.S. cities and offers free tax preparation services to lower-income taxpayers. Filing electronically offsets the excessive fees associated with rapid refund loans and it only takes an additional week or so to receive the funds.

Beware of similar money traps. Rent-to-own, payday loans and offers to use tax refunds as down payments for products such as cars and furniture are all shades of the same scam. These programs use loans and interest rates similar to RAL's.