Advances are actually loans with triple-digit APRs and high fees.
Tax season is officially upon us, and tax preparation companies like H&R Block and Jackson Hewitt are among several services that offer this benefit to clients: early tax refund loans. These loans are often marketed as a free way to get your repayment early, but is getting prepayment as good as it sounds – or is it just a short-term, high-cost cousin? the good old payday loan?
MagnifyMoney has done some research to give you information on repayment advances. Here’s what you need to know.
The turbulent past of prepayment loans
These so-called “prepayment prepayment loans,” as they were once called, are not exactly new. They have been around since the late 1980s, when e-filing was just beginning to gain momentum.
According to United States Census Bureau, these loans usually came with triple-digit APRs and high fees. Worse yet, the 2009 data released by the IRS suggested that these loans were primarily intended for low-income taxpayers. And more often than not they have been presented in a misleading manner and falsely advertised, according to the National Center for Consumer Law (CLB).
Not surprisingly, anti-repayment loans have become a source of consternation among consumer advocates. To achieve them, the tax preparation companies would take their share and then deposit the remainder of the refund into a temporary bank account that the taxpayer typically accessed through a prepaid bank card.
Fortunately, these loans became a thing of the past in 2012 amid a major outcry from consumer groups like the CLB and others. Ira Rheingold, executive director of the National Association of Consumer Advocates, told MagnifyMoney they are as predatory as payday loans are.
“Thanks to consumer complaints and government action, things got a little better, but these prepayment loans were known for their exorbitant interest rates and exorbitant fees,” he said. declared.
How Today’s Tax Refund Advances Work
Nowadays, repayment anticipation loans have been rebranded as tax refund advances. But there is more to the change than just the name. According to top tax preparers like H&R Block, Jackson hewitt and Freedom tax, these revamped products are 100% free for those who qualify. Advance amounts vary based on eligibility, but Liberty Tax offers up to $ 3,250.
Tax preparers are exceptionally discreet about eligibility criteria. (See our handy chart below.) H&R Block is the most to come, but there are still plenty of question marks. Their website says eligibility requirements include providing proper identification and a “sufficient” tax refund, whatever that means.
However, there are things that could make you turn down, including bad credit, failure to submit relevant tax forms such as W-2 and 1099, or failure to meet certain income requirements, among others. If you are approved, the loan amount is deposited into a temporary bank account that you can access with a prepaid debit card, unless the service offers a direct deposit option. Either way, the loan itself is indeed free of charge and has an APR of 0%.
Either way, experts still encourage consumers to approach with caution.
“From a consumer’s point of view, I would say he must be very skeptical,” Adam Rust, director of research at consumer advocacy group Reinvestment Partners and chief executive of the nonprofit SageSalary, said that “private companies do not provide free services and banks do not provide free loans.”
Tax advances are in fact more precisely qualified as loans. The money actually comes from the banks, which are reimbursed when your reimbursement arrives. In order to offer these advances, Rust says tax preparation companies cover bank charges, essentially making them free to the consumer.
“It’s actually a cost item for the preparers, which is all the more reason to suspect that these loans are not really free,” he said. “The price may say free, but that doesn’t mean it can’t be recouped as part of the cost of tax preparation.”
This is where things get a little less transparent. H&R Block declined a phone interview with MagnifyMoney, so I called my local storefront and asked if there was any additional charge for getting a tax refund advance. In other words, will my tax preparation fees be the same whether or not I receive a repayment advance? I was told it would, but getting an accurate estimate of the service is not easy.
According to National Society of Accountants, the average tax preparation fee for federal and state returns during the 2017 production season was $ 273 for people who itemized their deductions; $ 176 for those who haven’t. The takeaway here is that the complexity of the return appears to increase costs for consumers. To get an actual estimate you will need to submit your tax information, but the price you are offered is subject to change.
In 2016, consumer advocacy group Georgia watch sent mystery shoppers to paid tax preparation companies in low-income southwestern Atlanta neighborhoods. What they found was “a glaring lack of knowledge and professionalism on the part of the preparers, vast inconsistencies in preparation costs and a wide range of results given the same inputs at each site.”
Rheingold, who was not involved in the research, is not at all surprised by the results.
“The quality of tax preparers in high volume businesses is often quite poor,” he said.
Hidden costs to watch out for
If you are turned down for a tax refund advance loan, some tax preparation companies may offer you a concession price: the chance to get a refund transfer.
A tax refund advance may be advertised as free, but the same is not true for a refund transfer.
Instead of paying your tax preparation fee at the time of service, you can defer it with a transfer. Essentially, the tax preparer creates a short-term account where your refund is deposited, at which time they will take their fees directly. H&R Block charges $ 39.95 for a federal refund transfer. It’s called an assisted reimbursement at Jackson Hewitt, where it will set you back $ 49.95. Meanwhile, Liberty Tax says you should “consult your tax office” for pricing details.
It’s marketed for its speed and convenience, but Rust says taxpayers should think twice before signing up. Almost half of Liberty Tax filers last year ended up getting a refund transfer, according to the 2017 annual report of the company.
“This really tells me because the repayment advance is marked as free, but the repayment transfer is not,” Rust said. “So why are so many people paying for the transfer?” “
What Rust is getting at is that it seems like the allure of a free repayment advance draws people in, how sold they are on the repayment transfer after being turned down. Since the offer of these loans is a cost product for tax preparation companies, Rust says it’s a fair guess.
The cost of accessing your funds
Prepaid debit cards basically serve as replacement checking accounts for those who do not have one. Many tax preparation companies offer prepaid debit cards that customers can sign up for to deposit their tax refunds. However, these cards can incur additional fees that can eat away at the value of the tax refund itself.
“One of the things we’ve seen is the growth of prepaid debit cards to access your cash advance,” Rheingold said. “Access your money through an ATM [often] comes with a fee, which means you’re charged for accessing your own money. “
Jackson Hewitt puts the prepayment funds on the American Express Serve card if you are not making a direct deposit to your checking account. H&R Block goes with the Emerald Prepaid Mastercard, and Liberty Tax uses a Netspend Prepaid Mastercard.
Alternatives to a tax refund advance
You can always file earlier to speed up the arrival of your refund. Without a tax refund advance, most people who file electronically can expect their refund in less than three weeks, according to the IRS. The most common cause of delay is if you request the Earned income tax credit or additional child tax credit, which will delay your reimbursement at least until the end of February.
Regardless, for straightforward returns where the declarer only brings a W-2 and doesn’t detail, Rust says most preparers can probably get the job done in under 90 minutes.
“Should it cost more than $ 200?” Does the chance of receiving an advance justify spending so much when, instead, a low-income filer could go to a VITA site and have their return prepared for free? ” He asked.
Rust refers to the IRS Volunteer Tax Assistance Program, which offers free tax preparation to people who earn $ 54,000 or less per year. Those above the income threshold can also opt for out-of-the-box software like TurboTax. Prices vary here depending on the complexity of your return, but it’s usually a lot cheaper than going with a tax preparer.
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