Experts: Beware of Tax Refund Anticipation Loans

"It's a multimillion-dollar industry, and they target low-income filers because those are the people who live paycheck to paycheck," said Rachel Cooper, research coordinator for the Children's Defense Fund-New York.

"So they obviously know they're the ones most vulnerable for taking these. Middle-income families don't really need a RAL because they can wait [for a refund]," Cooper said. "For low-income families, they think, 'Oh, I can get my money immediately.' A lot of people don't really realize what they're getting, or more so that they could get their money from the IRS now just by e-filing."

Cooper said it can be hard to get the full picture about RALs by looking at commercial tax preparers' literature. "A large percentage of people don't realize that they're taking a loan, and with that they don't realize the consequences of taking a loan," she said.

Alan Berube, a fellow in urban policy at the Brookings Institution who has studied RALs, said data from 2003 shows that between 35 percent and 40 percent of filers who qualified for the EITC used the high-priced loans. "The use of refund anticipation loans is mainly among low-income filers," he said. "High-income filers don't use this product at all, really."

Protecting Taxpayers

It troubles Berube that those who opt for RALs seldom can really afford them. "What enables them to purchase the product is the fact that the Earned Income Tax Credit, for a lot of families, is a significant source of income," he said, adding, "They're still not making much at the end of the day, so spending $100, $150 on any financial products … I think that's a situation we all need to be concerned about."

Sen. Daniel K. Akaka, D-Hawaii, agrees. Last month, he introduced the Taxpayer Abuse Prevention Act, which, among other provisions, would prohibit RALs that use EITC benefits.