I learned the following from an IRS official who is active in volunteer tax assistance programs in our county:
…we are trying to concentrate our efforts on getting the earned income credit taxpayers to stop taking those refund anticipation loans. Out of the 4700 EIC filed returns in Gallatin County in 2004, over 3600 of them had refund anticipation loans! Not good in my opinion.
Refund anticipation loans are, along with payday loans, about as bad a deal as can be had. Interest rates run from 40% to as high as 700%. From a lender’s standpoint, they are gold – a guaranteed source of repayment, and an unsophisticated client in financial need.
I suppose you could say that people are their own worst enemy – that’s true. Most people haven’t a clue how interest is calculated. It isn’t normally taught in school. But the lending industry has to answer for its own behavior without regard to the sophistication of its clientèle. Regulation is in order, not because I think everything need be regulated, but rather because it would do some actual good. We could either ban the loans entirely, or regulate the rate of interest that can be charged. That would be a moral thing to do in am amoral “Gotcha!” marketplace.
IRS is doing its part – when people file electronically and use bank debits instead of paper checks, refunds are very quick. They are trying to get money to people as fast as possible to keep the refund anticipation people out of the picture. But one problem is that many low-income people don’t have bank accounts. Paper checks take a few weeks longer.
My oh my how we take advantage of one another. This is but one more way. The housing crisis was in large part brought about because of Shylock’s preying on uninformed and unsophisticated consumers. Payday loans may be outrageously expensive, but refund anticipation loans are as bad, if not worse.
Piece of Mindful 