Should You Use a Tax Refund Loan in 2010?
Loans are terribly hard to come by in 2010 because banks have tightened their standards, people are short on savings and income due to the lingering impact of a severe recession, and credit scores need to be higher than before in order to secure a reasonable loan. So many American taxpayers are eager to get any IRS tax refunds that are owed to them because they or their employers overpaid into the IRS fund that takes out estimated taxes on a regular basis. If that estimate was too high – and people paid in more than was necessary to meet their tax obligations – then the IRS does everything in its power to promptly refund the difference owed to the taxpayer. But many tax preparation businesses or other short-term money lenders also offer to give people their refunds ahead of time, in exchange for an added cost, so that taxpayers can essentially enjoy a cash advance on their upcoming IRS refund.
These short term loans are also called “tax refund anticipation loans,” and they are making a big comeback in 2010 because so many people are short on cash and want to use the tax refund loans to get their refund money early. They are convenient loans, but the downside to them is that the interest charged on them can run as high as 500 percent for a $300 loan over a 10-day repayment period, according to the study from the National Consumer Law Center and the Consumer Federation of America. Another way of looking at these loans is that they carry effective interest rates of 77 percent to 140 percent for a refund loan of $3,000 – which is the average amount of most of these loans.
That may be justifiable if you have a dire emergency and must use a tax refund anticipation loan to cover your expenses in 2010. But otherwise there are many other ways to borrow money at a much cheaper rate, and consumers and taxpayers are advised to first exhaust their more affordable and user-friendly loan options before resorting to a tax refund loan.
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