Mark Winslow, a medical physicist from Upland, Calif., was in no rush for his refund when he walked into H&R Block a couple of years ago to have his taxes prepared. So he declined the tax preparer's offer of a so-called quick loan to tide him over until the Internal Revenue Service check arrived.
"I thought the interest rate was outrageous," Winslow, 37, said of the annual interest rate of more than 19 percent, on top of a processing fee.
Such loans, he added, don't make sense if a taxpayer is expecting a refund within weeks. "It preys on poor people who need money the most," he added.
But millions of Americans lack Winslow's patience and buy pricey refund-anticipation loans, or RALs, instead of waiting for their free IRS checks.
Consumer advocates have warned taxpayers for years about the loans that, they say, drain millions of dollars out of U.S. tax refunds each year.
Indeed, 8.4 million Americans took out RALs in 2008, costing them $806 million in interest payments and fees, according to data recently published by two consumer advocacy groups; the Consumer Federation of America and the National Consumer Law Center. RALs often carry annual percentage rates as high as 500 percent, according to the law center, with an average RAL of $3,300 carrying a rate of 72 percent.
Refund-anticipation lenders often target low-income taxpayers, especially those who receive the Earned Income Tax Credit, according to the IRS. About 1 in 17 tax returns filed in 2008 involved a RAL.
"Refund-anticipation loans are extremely expensive and unnecessary loans that draw millions of dollars away from consumers," Jean Ann Fox, director of financial services at the Consumer Federation of America, said. "If you file your return electronically and get it deposited directly into your bank account, you can get all of your refund in less than two weeks, instead of sharing some of it with a banker."
Refund-anticipation loans are perfectly legal and offered by a wide range of national companies, including H&R Block, Liberty Tax and Jackson Hewitt.
Because tax preparers lack licenses to make the loans, they usually partner with large banks such as HSBC and JPMorgan Chase.
Kate Rauber, a spokeswoman for H&R Block, said that "not all RALs are created equal," adding that her company has taken several measures to improve service in recent years.
For example, she said, H&R Block has sharply cut prices and its average refund loan of $3,000 now carries an APR of 33 percent.
"These charges are similar to a convenience fee," Rauber said, referring to the $29.95 refund account fee and interest rates that H&R Block charges. "How many of us have paid expedited shipping fees to get something faster we ordered online?"
Tax preparers offer customers no-fee options during their appointment and inform clients five times of costs associated with RALs before they're asked to sign on the dotted line, she said.
Sheila Cort, a spokeswoman for Jackson Hewitt, said that RALs may be an "effective option to address a specific, timely individual need," adding, however, that many clients also choose cheaper alternatives, including the IRS' free direct deposit.
As is often the case with pricey financial products, RALs are often bought by consumers who might be desperate for cash or unaware of how the IRS operates.