It's income tax time, and for many people that means tax refund time. With money tight, these refunds can provide desperately needed cash. So if someone offered to give you your refund now instead of waiting for the IRS to send it, you might jump at the chance. But you would be wiser to run the other way!
Known as "instant refund loans" or "refund anticipation loans", these come-ons offer to loan you the amount of your tax refund (usually up to a maximum of $5,000) within one to two days of filing. But the cost is enormous! According to the Consumer Federation of America and the National Consumer Law Center, for the average refund of just under $2,0000, most borrowers pay an annual percentage rate of 222.5% and some pay as much as 2,000% (yes, you read those numbers correctly)!
But the rip-off doesn't stop there. Remember that this is not your refund, this is a loan against your refund. What if the IRS sends back less than you thought? Maybe you forgot about past-due child support or an unpaid student loan. Too bad. Even if you don't get the amount of the refund you expected to receive, you still owe the loan amount - plus the accruing interest!
The lure of quick cash can be intoxicating. But with electronic filing now available, typically this loan would get you the funds only a week or two earlier than if you waited for the IRS to send it. In an effort to help, the IRS has made electronic filing free to some tax payers. Look at FreeFile on the IRS website to see if you qualify. The site will refer you to a list of vendors that provide this service. But beware! You can bet that some of them have ads offering refund loans. Unless you absolutely cannot wait the extra week or so, don't take the bait. It could easily be the most expensive money you've ever borrowed.