Stronger Protections Needed for Low- to Moderate-Income Taxpayers from Refund Anticipation Loan Charges of 187%

The advertisements have already begun on television. Vendors are advertising refund anticipation loans, which offer customers money in a short-term loan (7 to 14 days) on their tax returns. What the advertisements do not say is that the average cost of a refund anticipation loan is $100 on an average tax return of $2,050. That is a 187 percent annual percentage yield, not including a $30 administration fee.

Even more alarming is the introduction of “pay stub loans,” which offer customers a loan on their tax refund even earlier than refund anticipation loans by using customers’ pay stubs instead of their W-2. The loan is not based on the amount of the tax return but on the anticipated amount of the tax return, which could fall short, leaving the customer to come up with the difference.

Vendors contend that refund anticipation loans survive in the market due to customers’ impatience. But data from the Internal Revenue Service show that 79 percent of refund anticipation loan recipients in 2003 were the people who could least afford them—those with an adjusted gross income of $35,000 or less.

“Every year at this time taxpayers are overwhelmed with commercials for refund anticipation loans promising easy money, but taxpayers are unaware of the steep interest that vendors charge,” said Dory Rand, supervising attorney of the Sargent Shriver National Center on Poverty Law’s Community Investment Unit. “These vendors typically prey on people who are unaware of their options, and these kinds of products strip away any cash people have and continually keep them behind on their other bills.”

Federal legislation should be introduced in Congress to provide stronger protection for taxpayers from unscrupulous refund anticipation loans than is currently offered in the states. Effective legislation should limit the amount of interest that may be charged, limit the times borrowers can take out refund anticipation loans, and require all providers of such loans to disclose fully all information regarding fees as well as the IRS’s tax return direct deposit program.

Congress also should provide funding to eligible entities to provide free or reduced-fee tax-preparation services to low- and moderate-income taxpayers and to assist individuals in establishing accounts in federally insured depository institutions. 

The Shriver Center is invested in building the stability and strength of families and communities through increased asset protection. For more information, contact Dory Rand at doryrand@povertylaw.org or Jami Schlafer at jamischlafer@povertylaw.org.