‘Same Day’ refunds are really high-interest loans that can be risky

FREEHOLD, NJ – Tax season is under way, and many people are looking forward to getting a check from the Internal Revenue Service.

Those who are cash-strapped may be tempted by signs from tax preparation firms that advertise “Same Day” refunds, “Instant Return” refunds or “One-Day” returns. The Monmouth County Division of Consumer Affairs wants to caution you on these arrangements.

“While you think you are signing up for a quick return, what you’re really signing up for is a short-term, high-interest refund anticipation loan,” said Freeholder Lillian G. Burry. “These loans are legal, but the businesses who offer them are required to advertise what they are and, in many instances, they do not.”

Known as RALs, refund anticipation loans are bank loans secured by the amount of a person’s expected income tax refund. Once a tax return is filed electronically by a commercial tax preparer, a third-party bank can provide the loan to the taxpayer in the amount of the expected refund.

Various costs, fees and finance charges are deducted from the check, which usually arrives in three to five days – or within a few hours for an extra fee. In turn, the IRS sends the taxpayer’s actual refund check to the bank to pay off the loan.

“Typically, a consumer will receive a check that can be cashed at a bank,” said Annmarie Howley, Consumer Affairs director. “Consumers need to know that in addition to each bank having its own check-cashing policy, a bank can also place a ‘hold’ on a check presented for deposit or cashing. If they are filing for a refund online, they can expect the money to be deposited in their bank account usually within 10 days of filing.”

Last year, interest rates on many of these types of loans ranged anywhere from 50 percent to 500 percent. The combination of widespread money woes, a sour economy and fatter tax refund checks for poor families is expected to entice more people into taking these types of loans. 

“These short-term, high-interest loans prey on the very people who can least afford them,” warned Burry. “Tax preparers charge interest rates that can run on an annualized basis well into triple figures, all for the privilege of getting money a few days earlier. It’s an outrageous rate and they prey on those who can least afford to pay interest on their return.”

New Jersey caps the interest rates lenders can charge at 30 percent, but some tax preparers circumvent state usury rate caps by partnering with banks chartered in states such as South Dakota and Delaware that have no caps.

“Residents should be very careful when considering using any option for a quick tax return,” Howley said. “Taxpayers need every dollar of their refunds, and waiting just a week or two will put more money in their pockets.”