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Many consumers expecting a refund are anxious to get it as soon as possible. That makes them vulnerable to promises of quick tax refunds. They may need the money to pay rent or make immediate debt payments. Often what happens is that consumers lose a large part of the refund to interest and fees.

Called Refund Anticipation Loans (RAL), these loans are usually not good loans to accept. As reported by the Consumer Federation of America, 8.4 million taxpayers paid millions of dollars to companies offering RALs. They also paid $738 million in loan fees. There was another $68 million paid in other fees.

It is hard to believe that so much money was paid in fees to obtain tax refunds that could have been processed in less than two weeks by the IRS. Sometimes the fees literally eat up the entire refund leaving the consumer nothing.

There are 12 million people who paid out $360 million to tax preparation companies or quick money companies to buy financial products. Many of these people believed they had to do this in order to get their refund faster.

The federal government is investigating many of the nation’s RAL companies. Recently the Santa Barbara Bank & Trust was ordered to stop making RAL loans. The federal regulators are viewing these loans as predatory in many cases because they target low income and financially desperate consumers.

The RAL is a short term loan that usually has terms extending 2 weeks. It is not a coincidence that the loan term is only one to two weeks because that is all the time it takes to get an automatic deposit of an IRS refund. But if the refund is late for some reason, expensive fees are initiated that can quickly eliminate a taxpayer’s chances of seeing any of the tax refund money.

In 2008 approximately 1 out of every 17 returns was involved in a Refund Anticipation Loan. Jean Ann Fox is the Director of Financial Services for the Consumer Federation of America. She was quoted as saying, “In tough economic times, quick money may be tempting. But American taxpayers need every dollar of their refunds, and waiting just a week or two will put more money in their pockets.”

The Santa Barbara Bank & Trust was responsible for most of the RALs offered by Jackson Hewitt. This has put a real crimp in Jackson Hewitt’s ability to offer RALS.

That is fine according the Consumer Federation of America. Americans who want a rapid refund should simply file their tax returns electronically. Consumers can request the refund money be deposited directly into their bank accounts.

The effective annual percentage rate applied to RALs is an exorbitant 50 percent to 500 percent. The lowest loans cost the highest percentage. A consumer expecting a $300 loan could end up actually paying the loan much more than was borrowed. This is due to the add-on fees that accumulate rapidly.

The bottom line is that RALs are not good financial products in most cases.

Consumers Lose Millions To Tax Refund Operations is a post from: Thistle Debt Consolidation