Consumer Advocates Warn Against Paystub Loans
MADELEINE BRAND, host:
This is DAY TO DAY from NPR News. I'm Madeleine Brand.
Need some easy money for some last minute present buying? You can get a loan based on the tax refund you might get next spring. It's called a pay-stub loan, but consumer groups call it holiday loan sharking.
From member station WSHU, Charles Lane has more.
CHARLES LANE: Pay-stub loans are the new holiday version of refund anticipation loans. Those are the loans tax preparation companies offer based on an expected refund check. Only with the new pay-stub loan, you don't need a W2, just a recent pay-stub, and customers can get their money now before Christmas - which some people think is a good deal.
Ms. KIM PARKS(ph) (Teacher Assistant): Because I'm broke.
LANE: Kim Parks is leaving in an H&R Block in the village of Hempstead on Long Island, New York. Hempstead is a mostly African-American and Latino neighborhood well known for its poverty. There are lots of tax offices offering quick holiday cash. That's something Parks says she needs.
Ms. PARKS: I said, with Christmas around the corner, I was trying to get a little bit more money so I can give my son the gift that he wants, and my daughter - and my daughter's birthday is Sunday. So it's like I had so much plans and so much things I wanted to do, but now getting this money is going to be hard for me now.
LANE: Parks is a single mother and works as a teacher's assistant, making $27,000 a year. H&R Block offered her a $600 loan against her anticipated 2006 tax refund.
Did you ask what the fees where when you were…
Ms. PARKS: Yeah, she told me. It's about like $25, which is not that much.
LANE: What Parks didn't realize was that the fee is an addition to a 36 percent annual interest rate. Still, Parks says she wants the money.
Ms. PARKS: Hell, yeah. Because I got none right now. So I'm pissed off, so - because it's like what's the sense of waiting two weeks, when you can get about $1,500 now and spend it? And when the two weeks come, you have so more money.
LANE: Had Parks gone to the nearby Jackson-Hewitt Office, she would have paid $105. That's more than four times the cost of getting cash from a typical credit card.
Ms. SARAH LUDWIG (Co-director, Neighborhood Economic Development Advocacy Project): Yeah, I mean, these holiday-now loans, we see them as just another way that financial services companies have found to strip working people of their cash.
LANE: Sarah Ludwig is co-director for the Neighborhood Economic Development Advocacy Project.
Ms. LUDWIG: They're living in neighborhoods, largely speaking, where everywhere what you see are ads for quick cash, money now. Low-income people right now are paying something like 10 percent of their income for financial services. They're getting gouged.
LANE: High fees and astronomical interest rates aren't the only risk. Because these pay-stub loans aren't based on any actual tax filing, there's a substantial risk that a tax refund will fall short of the original loan. That could send the customer into spiraling debt. It's something the IRS's taxpayer advocate, Nina Olson, finds reprehensible.
Ms. NINA OLSON (National Taxpayer Advocate): They're just sitting ducks for people to sell them products, products with very high rates of interest.
LANE: This is exactly the reaction H&R Block was hoping to avoid. The company's CEO Mark Ernst suggested that pay-stub loans could be a bad deal for some customers and could diminish the reputation of the entire tax prep industry. But Olson says the industry can't get away from the loans entirely.
Ms. OLSON: They would also lose the return preparation business, because there is a check cashing place across the street from them, and will still do the refund anticipation loan.
LANE: One thing that could reduce demand for these types of loans is if taxpayers got their actual refunds sooner. Olson says the IRS has the potential to get every citizen their refund in two to three days. But that means revamping their 1960s-era computer system, a job that could take several years to complete.
For NPR News, I'm Charles Lane.
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