Money Coach: Tax Rebate Loans A No-No

Personal finance contributor Alvin Hall advises against the use of tax rebate loans, and offers tips on what to do if you're running against the April 15th IRS deadline for paying your taxes.

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MICHEL MARTIN, host:

The clock is ticking. April 15th is tomorrow. Now, that's the dreaded deadline by which Americans must file their taxes. And if you are eligible for a refund, and most people are, and you need some cash, and most people do right now, then you may be tempted by something called a tax rebate loan, also known as a refund anticipation loan.

Now, these loans might seem to be a good deal, but are they? So who better to ask than our personal finance expert, Alvin Hall. Welcome back, Alvin.

ALVIN HALL: I'm glad to be here and especially to talk about this topic.

MARTIN: Because?

HALL: Because it's one of those things that people are tempted by at the last minute. You see you're going to get that refund, and you say, oh, I can get that money tomorrow. And these tax anticipation loans are one of the worst deals around.

MARTIN: Really, why?

HALL: Because the companies that do this charge you a phenomenal interest rate. According to recent research by the Consumer Federation of America, the interest rate is typical 77 to 88 or 85 percent, just on the loan.

If you add in all the administrative fees, bank account fees and all of that, it can go up to 500 percent annually. And in some cases, people have reported paying 1,000 percent annually.

MARTIN: Oh my goodness. So I have to assume these are unregulated.

HALL: They are unregulated, although I think Senator Dick Durbin has proposed new legislation that would cap these at 36 percent. Capping them at 36 percent still seems outrageous to me, but I suppose the lobby, the banking lobby or the tax filers' lobby really is in there. They're just yelling at him, saying that's too much, we need to have more profit on this.

MARTIN: If you're having your taxes prepared, if your preparer suggests such a thing, what should your reaction be?

HALL: Just say no. People need to realize that if you have a bank account and you file your taxes electronically, the Federal government, the IRS, will rebate your money in typically 10 days.

MARTIN: Ten days?

HALL: That's all it is, 10 days. So people will file for these refund anticipation loans so they can get their money in two days. If they were willing to wait merely eight more days, then they would get that refund with no charges associated with whatsoever.

MARTIN: And how typically are these loans administered? What do you do? Do you take your tax refund to like one of these payday lenders or something of that sort? Is that how it happens?

HALL: No, you're with a company like H&R Block or Jackson Hewitt. As you're filling out your form, and they're filling out your taxes, they will then say to you, well, if you file this electronically and you take out a refund anticipation loan, then you won't have to pay any fees because we'll deduct your fee from the loan that you are getting.

You won't have all these other charges because they'll be included in this. And you won't have to pay us any money, and when your rebate comes in, we'll apply it against your loan.

MARTIN: But you are paying the fees. They're just getting their money up front.

HALL: Exactly, and they are wrapping it into your loan so they can charge you interest on the total.

MARTIN: So this is just a bad idea?

HALL: It's a bad idea all around. Another thing people should realize is that if your earnings are $56,000 or less a year, then the IRS offers a service through which you can file your own taxes electronically. It's called Free File, which you can reach through the IRS' Web site.

You can file your taxes yourself, without having the temptation of that refund anticipation loan being dangled in front of you.

MARTIN: If you cannot file your taxes by April 15th, for whatever reason, what should you do?

HALL: File an extension. Do not simply ignore your taxes. This is one of my great, great crazinesses. When I set up my own business, I actually incorporated my business very close to tax day because I tell everybody, whether you like it or not, your business partner, your partner in all of your earnings, is the U.S. government. It's best for you to keep them aware of what's going on. Even if you have to file an extension and then file your taxes later on, at least get that extension in place.

MARTIN: Can I just ask you this?

HALL: Yes.

MARTIN: Have you ever been tempted to ignore your taxes?

HALL: No. On a personal level, taxes are important to me because having been raised so poor and having been on welfare growing up as a child, I personally view part of my success in life and the money that I earn as being a payback for the years when the government supported me, my brothers and sisters and my parents.

That's a deeply personal thing, so although sometimes my tax bills are much higher than I would personally like for them to be, I always think when I had nothing, we always could fall back on welfare. So if there's somebody else out there who is in my situation, who could do what I've done with my life or better, I'd rather pay my taxes, hope that they get those benefits that can enable them to go to school, get an education and accomplish something in life. And then I hope they'll remember my story and pay their taxes diligently.

MARTIN: All right. Personal finance expert Alvin Hall joined us from our bureau in - I thought you were going to preach there for a minute there.

HALL: I came close to it.

(Soundbite of laughter)

MARTIN: Thank you, Alvin.

HALL: You're welcome.

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