RAL realities

We live in a go-go world, with too much to do in too little time. The boss wants that just-assigned project yesterday and even microwaves take too long to heat up dinner.

Such impatience explains why some people are attracted to refund anticipation loans, often referred to as RALs.

The financial projects, popularized by franchise tax preparation firms, provide filers with quick cash that they pay back when their tax refunds arrive. Of course, in the couple of weeks that takes, the impatient filers have incurred interest charges on the loan, sometimes a lot of interest charges.

As soon as RALs appeared, consumer activists mobilized. In addition to the obvious problem with exorbitant loan rates, by some accounts as high as 500 percent when annualized, consumer advocates say too many people don't realize the products are loans.

Over the years, lawsuits have been filed and settled. The nation's largest tax preparation chain, H&R Block has been a frequent plaintiff in the cases. Now the company apparently is looking to preempt further legal action.

Realigning RALs: H&R Block says it now "will provide clients convenient access to information about debts that could affect their tax refund loan, as well as an improved disclosure process to ensure clients can make the most informed decisions about how to receive their tax funds."

In essence, the company is promising to 'fess up about RALs.

The announcement was made in conjunction with HSBC North America, which handles the loans, and Block says the changes will be put in place for the coming tax filing season. 

The loan disclosure documents that Block customers will get will, according to the company, explain in plain language that refund anticipation loans are, in fact, loans.

In addition, Block says customers will receive a side-by-side comparison chart outlining all filing options, fees and the time it takes to receive a refund, as well as a new "debt alert." This service will let Block customers know about possible outstanding tax-related debt that could affect the loan decision.

On a more personal level, the Kansas City, Mo.-based company said its employees will be charged with reminding clients who choose RALs that they can keep more of their refund by selecting a non-loan product.

With the start of tax-filing season just six weeks away, Block's timing is critical. The beginning of every filing season is prime RAL season, as taxpayers who expect refunds -- and who are facing incoming holiday credit card charges -- look for ways to get their tax money ASAP.

Get real about rates: Earlier this year, the tax-prep giant said it would cut the cost of RALs by more than 40 percent compared to last year's loans. When taken as an 11-day loan, the new finance charge will come to a 36 percent APR.

Thirty-six percent? Eleven days? If you file electronically, especially early in the season, you'll get your refund almost that quickly (it usually takes around 14 days for the IRS to process e-filed returns) and you won't have to pay anywhere near that. In fact, you might be able to e-file for free.

Sure, you have to wait until mid-January when the agency starts accepting the electronic filings, but when it comes to 0 percent vs. 36 percent, I would wait. Especially since if you're getting a refund, you've already been getting the short end of the interest stick for months. That money the IRS will be sending you is your cash that you had over withheld for a year, letting the feds use it all that time as an interest-free loan.

You've still got time to adjust your withholding so that you get at least some of your money in time for Christmas shopping. And the move could be doubly rewarding.

First, it will help you realign your payroll taxes so that you end up more accurately paying, not over- or underpaying, what you owe the IRS.

And even better, with a little bit of extra income, you'll be able to purchase at least a few of your holiday gifts rather than charging them. That will help ease credit card holiday overload and the need for fast cash to pay them in January.

Comments

[Laura Morton]

Starting 2011 tax year the IRS will put an end to the debt indicator. This in effect makes it more difficult for the tax preparer to make the loan.
Not many people realized that they are taking out a loan.

[Dimes]

Oh this year HR Block has something new, like the Jackson Hewitt loan from last year, like Kira said. The charges are apparently a lot less than before but I do think it's due to getting HSBC to cut their finance charges. ANother thing is they have this debit card thingy which will immediately save you $25 if you choose it over a paper check. Block claims that they're encouraging fiscal responsibility, though I suppose if all their customers were fiscally responsible they'd be seeing a lot less business.
You'd be amazed at the impatience of some people, who show up at the tax office the first week of January with 1 w-2 and file, then have to come back to amend everything twice. They just needed money real bad, but apparently were unable to wait for all their paperwork to show up. Sigh.

[Trish]

H&R Block reduced it's loan fees by using their clout to get their bank (HSBC I believe) to reduce their fees and then passed them along. HRB will be making the same amount of money. Or even more if the increase their prep fees again. As for the disclosure, they might have some new documents to wave around but that info is something that the preparers has always been told to tell the client. (I know, I started with HRB) Unless they have a better way of checking up on their employees, disclosure is not going up that much.

I offer RALs. I don't do very many and I offer them as much for the RAC program (client's money is not advanced but using the bank allows the preparation fees to come out of the refund.)So, I will have to disagree with Ralph that most of the RAL customers could do their own return. Yes they are simple returns but the taxpayers either really can't do a return or they are not comfortable doing it themselves. We are not talking simple math here. We are, especially with EIC returns, talking about more complex issues of filing status, dependency and credit qualifications.

[Kira]

H&R Block is coming out with a new product which is essentially a double loan - for people who only have W-2 wages and nothing else to report, and take the standard deductions, they will preemptively figure your refund by as early as November 20th, give you a loan, then have you come in and do your taxes in January, then give you another loan to pay off the first, and then you get your actual refund.

The other tax houses charge a lot more, but Block has more money so they get sued more often.

[Ralph]

Good advice - unfortunately the people who take out RALs are unlikely to be reading blogs about personal finance and taxation.

It's just another tax on stupidity. Anyhow the interest on these loans is miniscule (36% APR for 11 days is just about 1% of the amount borrowed.) It's the fee charged to take out the RAL that is prohibitive - but it's reasonable as you have to pay for the admin work involved in processing the loan app.

Most of the people taking out these loans have simple financial affairs, so could do their own tax returns and save way more than the amounts involved with the RAL.

Regards
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