When real life meets tax refund loans

Last week I joined the chorus of folks cheering the IRS' decision to no longer provide lenders with a debt indicator for taxpayers.

The assumption is that discontinuation of what is essentially a government provided credit check mechanism will likely reduce the number of refund anticipation loans (RALs).

But you know what they say about assume.

I still don't like RALs. Too many of the providers of these short-term loans prey on desperate people who end up in worse financial shape because of associated fees and the fact that they just can't pay back the loans, tax refund notwithstanding.

Several blog readers, however, quickly let me know that the end of debt indicators will not eradicate RALs. Why? Because the need and/or desire for fast refund money has deeper, more troublesome financial roots.

Direct deposit, which the IRS touts as a way for taxpayers to get their refunds in as little as a week after e-filing, isn't an option, notes Amy, if you don't have or trust a bank or don't have enough impulse control/financial understanding to keep an account open.

"Even assuming a bank account exists, 10 days just isn't fast enough to people with a certain mindset. In general, we're talking about people who also patronize payroll loan services, meaning they can't make it a whole week or two between paydays," she wrote in response to my debt indicator post.

Compounding the problem, Amy adds, is the fact that most of the folks who are attracted to RALs tend to have little investment in "the system" and little savvy within it: "Without the cash to get someone else to do it for them and no immediate return on 'investment,' there might be folks that end up skipping filing altogether."

It's such "noninvested" folks, often called the unbanked, that are the focus of a USAToday story in which reporter Sandra Block points out that the many people who shun bank accounts usually end up paying more for financial services.

Or, as @Eligabiff noted when she passed along the link to me, "Good article about the cash-based society. These are the RAL clients!"

So, upon further reflection, I'm tempering my debt indicator cheering a tad.

I realize that this one move by Uncle Sam is not the magic bullet to take down RALs.

I'm even conceding that in some very specific taxpayer situations, a RAL might be beneficial.

But I'm still glad the IRS won't be even remotely complicit in the issuance of these loans.

And I join Amy, Elizabeth and all tax professionals who deal with cash-strapped clients frantic for their refund money as quickly as possible in hoping that we can eventually find a solution to one of this country's core financial ailments instead of just treating symptoms like RALs.

Related posts:

• IRS debt indicator decision could doom tax refund anticipation loans
  
• RAL realities
  
• Refund loans and the once-a-year 'rich'
• Check cashers and recession talk
• George Bailey lives!
• Anti-RAL efforts continue
• Refund anticipation loans under the IRS gun again 
• Refund loans on the ropes? 

Want to tell your friends about this blog post? Click the Tweet This or Digg This buttons below or use the Share This icon to spread the word via e-mail, Facebook and other popular applications. Thanks!

Comments

[Mortgage Brokers Perth]

There was a time when I experienced loaning a small amount of money for home expenses but it wasn't a nice move on my part as I was later given a bigger problem by it.

[tax refund loan]

I am speechless. This is a fantastic site and very engaging too. Excellent work! That's not really much coming from an amateur publisher like me, but it's all I could think after enjoying your posts. Great grammar and vocabulary. Not like other site. You really know what you're talking about too. So much that you made me want to explore more. Your blog has become a stepping stone for me, my friend. Thanks for the detailed journey. I really enjoyed the posts that I have read so far.

[Government Small Business Loans]

This hurts big time. I hope this issue will be resolved soon in favor of the masses.

[No Refund]

Just eliminate the REFUND altogether, all 100 million. Let the IRS collect taxes only.

[Premium Finance]

Amazing read. Interesting take on finances. This is a very important aspect of peoples' lives nowadays.

[Tracy]

Taxes are always another fun. It seems as if you got some good things going between this blog and your book, keep up the informative blog post.

[Elizabeth R.]

It would be interesting to know how many of these RAL clients are really required to file. Maybe the government will end up saving money because of unclaimed EITC and other refunds if they really don't file because of not having RAL's or a bank account.