In my last post, “How To Legally Increase Your Take Home Pay With This Rent To Own Tax Strategy“, I told you that I was going to share with you why, in the immortal words of Tom Cruise from the movie, “A Few Good Men”, why tax refund advances, “Rapid Refunds” and refund anticipation loans (R.A.L.s) are for the “galactically stupid” and not my readers who are amongst the top 3% of the nation in financial literacy.

Yes, I am talking about you!

Ok, moving on. Let’s talk about the Rapid Refund RipOff.

Rapid Refund, Tax Advance Refund & Refund Anticipation Loan (R.A.L)

Tax refund advances and the so called “Rapid Refund” are just different terms for what is legally called a refund anticipation loan or R.A.L.  A refund anticipation loan is just that, a loan that is based on your anticipated tax refund. The operative word here is “loan”. As you are aware, loans carry with them fees and interest charges. In the case of Rapid Refunds, the fees and interest can be exorbitant and heavily eat into your refund.

If you read my prior post, “Why Tax Refunds Are ONLY For The Financially Uneducated“,  you know that tax refunds are ONLY for the financially uneducated because you are getting a refund of money that you stupidly overpaid the IRS. You then get the added insult and expense of having to pay a tax professional or software company like Intuit, the makers of TurboTax, to have your tax return prepared to prove that you stupidly overpaid the IRS and let them hold your money for a year at 0% interest.

Now, let’s expand that a little further to a Rapid Refund. So, you overpaid the IRS and lost out on cash flow and opportunity to invest the money and yield a return. Then you got the additional loss through the expense of tax return preparation to get your own money back. Now, with a Rapid Refund, you are going to add even further insult to injury and pay more fees and high interest to get the money you stupidly overpaid the IRS back even faster. Not smart.

These refund anticipation loans are being heavily marketed in the current “bad” economy. They often charge high fees and predatory interest rates to people who can ill afford it.

It has gotten so bad that state governments, the federal government and consumer advocacy groups are rallying to the battle cry of financial literacy. Take a look at a few excerpts from a recent article from the L.A. Times and what the Attorney General for California had to say a couple of days ago:

“With tax time around the corner, the California attorney general’s office is warning of the dangers of taking out high-cost tax-refund anticipation loans, sometimes presented as “rapid refunds,” that can cost consumers hundreds of dollars in fees and come with high interest rates.

The refund anticipation loans, often marketed to people who are filing electronically, “push taxpayers to borrow their own money instead of collecting their full refunds,” Atty. Gen. Jerry Brown said Monday.”

Now, fasten your seat belts, here’s where it gets really interesting. The article continues with some staggering numbers:

“About 8.4 million taxpayers in the U.S. paid more than $800 million in fees on tax-refund loans in 2008 that could have been avoided, said Jean Ann Fox, director of financial services at the Consumer Federation of America advocacy group.”

“Many people don’t realize how much this will cost them in the end,” Fox said.

The consumers would get their refund relatively quickly anyway, the consumer advocate said. Electronic returns usually arrive within two weeks.

“There isn’t much of a reason to get a tax-refund anticipation loan,” Fox said.

“Don’t let them talk you into anything else.”

Wow! $800 million in fees to loan people their own money! That is ingenious. ……..f you are the lender. But, hey, don’t take my word for it. I am just a guy who has made every financial mistake known to man trying to protect you from doing the same. Take a look at what The United Way has to say:

“Can you imagine spending up to a full week’s wages on a service that speeds up your tax refund by only one week? It may sound crazy, but each year, many Wells County residents pay outrageous fees to borrow their own tax refund money.

We’ve all seen the commercials for “Fast Cash Refunds”, “Express Money” and “Instant Refunds.” In this tough economy when money is tight and bills are due, these offers seem tempting. However, most of these too-good-to-be-true “refunds” aren’t refunds at all. They are short-term loans with APRs that can reach over 700%! These loans are borrowed against your own tax refund money and come with a hefty price tag.

Let’s say you are expecting a tax refund of $2,000, and you visit a tax preparations site that offers a “fast cash refund”, promising that you will get your money right away. You can expect to pay a RAL (Refund Anticipation Loan) fee of about $75, plus an Electronic Filing Fee of $75 more, in addition to a Tax Preparation Feel of around $100. You just paid $250 (nearly a week’s wages for some workers, and more than 10% of your refund!) to get your money just a week earlier than you would have with a direct deposit from the IRS. Is it worth it?”

Did they just say that the APR on these loans was 700%???

I think you get the point.

So, to review, not only do you NOT want a tax refund, you also do NOT want to pay a 700% APR on a refund anticipation loan to get your own money back.

Have I ever personally gotten a refund anticipation loan or “Rapid Refund”?

Of course. I used to be galactically stupid about everything related to money, finance, taxes, investing, financial planning, budgeting, making more money, generating wealth, creating multiple streams of income, etc.

I have already put my hand on the stove. It’s HOT!…..and I have the scars to prove it. You don’t need to do the same thing. I can tell you it is hot and will burn you.

I will stipulate to one thing here. While I do not recommend Rapid Refunds, there are times that circumstances are such that you need cash and you need it fast. If you are at risk of not feeding your kids then obviously, it is any port in a storm and you need that money now, regardless of the expense. The key here is to examine what got you into that bad of a situation to begin with so you can plan better going forward and not get into the same situation again. Typically, it is either no tax planning, no budget, no financial management, no emergency reserve, or a combination of these.

So, if you were contemplating getting a Rapid Refund, ask yourself if you really need it or can you avoid the expense and wait for your money?

What are you planning on doing with your tax refund?

Invest it? Blow it? Take a vacation? Buy a home? Repair Your Credit

I would love to know your plans. Please tell me your plans in the comment box below.

Tagged as: income tax planning, rapid refund, tax planning, tax planning strategies, year end tax planning