This tax season 10% of Americans will let someone borrow them their own money through a refund anticipation loan. Rates might be as high as 744%. A rapid refund is just your income tax refund given to you on the spot by your tax preparation service- usually within 1-2 days. Rather than waiting for your tax return to come through the mail or via direct deposit directly from the government some people are choosing to get money in their pockets immediately at a great expense to themselves. Despite the length of the loan lasting only about 10 days they are costing individuals hundreds of dollars in some cases.
Predatory Lending
Overall this predatory lending practice is estimated to cost Americans as a whole about 500 million dollars a year. Unfortunately poor people tend to be affected the most because they have a greater need to get their money as fast as they can. Those targeted most tend to be recipients of EITC, the Earned Income Tax Credit. They recently accounted for 55% or refund anticipation loans. The program, formed in 1975 to help low wage workers is being undermined by tax preparation services that are eating away at these refunds. Refunds that are being awarded based on the EITC cornerstone that qualifiers for EITC get most of the federal taxes refunded in an attempt to relieve poverty for hard working people.
It seems silly to many of us that someone would pay as much as $218 out of a $760 dollar tax refund to get their money in 1-2 days instead of only 10 days when filing electronically, directly with the IRS. But many of us don’t understand the desperation so many people feel when they are trying to make ends meet on a low income.
Tax Education
People need to be educated that they don’t have to give up their money in the first place. Employers will let workers change their W 4 forms to adjust their withholding to more closely match their tax responsibility. That way, people aren’t paying out their wages in taxes throughout the year unnecessarily in the first place. People also need to be educated that electronic filing is free for many people now and with direct deposit it only takes about 10 days to get a refund.
Tax Help
If your financial life is difficult its important to weigh the benefits and drawbacks of getting money fast vs. getting more money by waiting only 8-9 more days. Free filing is available to those who qualify using the criteria that can be found at www.irs.gov. Assistance from the Volunteer Income Tax Assistance program is available for people with incomes less than $35,000. VITA can be reached at 800-829-1040 with sites around the country. Keep what is yours – don’t let H&R Block or Jackson Hewitt keep part of your hard-earned income. Explore your options and be patient- it might save you a couple hundred dollars or more.
Ron Finkelstein is NOT a Tax Attorney or an accountant. He is merely a small business owner who has paid a lot of money over the years to learn a whole lot about Taxes and Time Management.
If you enjoyed this Tax Refund Anticipation Loan article, you should check out more Tax Tips and How to get Free Tax Software
What could be better than getting an advance on your tax refund from the good ole IRS? Well, you better give some thought to the fees you are paying for that advance.
America is a capitalist country and home to many creative people. You can even find them in the field of tax preparation, a bland area if ever there was. The interesting service in this case refers to loans being made by tax preparers in concert with banks to taxpayers. There is nothing inherently wrong or illegal with such loans, but it is a case of buyer beware. The fees can be atrocious.
The loans at the heart of this article are called a couple of different things. The most direct name is a tax refund loan. A less direct name is a “pay stub” loan, in reference to the use of paycheck stub information to figure out how much money to loan you. While these loans are fine and dandy, they can come with some atrocious fees.
Short term loans are inherently expensive. Why? The financing party doesn’t have a lot of time to watch interest accumulate and collect it as would be the case for a home mortgage. Instead, they need to find a way to make money on the loan quickly. They do it with fees. In the pay stub loan business, the fees often equate to 10 percent or more of the loan. That is a pretty high percentage for loaning you money for a couple of months.
Before I go any farther, it is important to understand there is nothing wrong with lenders doing this. They have every right to make money and every right to charge you fees. The burden is on you to determine whether you really need that money now. If you do, then why don’t you go ahead and file your taxes early? I know that is a shocking idea, but there is nothing prohibiting you from doing so. The IRS will now wire you the refund, so you shouldn’t have to wait to long for your mulla.
At the end of the day, it is your decision as to whether you want to take a loan against your taxes. Some will and some will not. Whatever your decision, just make sure you go in with your eyes open to the fees.
Stated Income Loans are used mainly by self-employed borrowers to qualify for a loan. The most common kind of loan that offers stated income approvals are mortgages. Self-employed people usually have trouble in proving their monthly income. For example, it is highly possible that a contractor might only be paid several large payments for work a few times a year, which will prevent him from proving a stable monthly income. Workers who earn a large amount of tips might not want to claim all their income considering the tax.
To cope with the demand for flexible loans, lenders have established a different package of guidelines for approval. These programs are now very common, and will surely become more mainstream in the future considering the fact that the jobs and the economy have been less reliable. During the subprime mortgage boom, many income programs appeared. The major part of these programs were called “liar loans,” and almost lost their credits with banks and lenders due to high foreclosure rates. In order to slow the foreclosures tide, lenders have prohibited these programs. The approval procedure for a stated income loan is now much stricter, but there are still a lot of options available to the borrower. The new guidelines emphasis on several factors: credit, assets, and collateral.
Credit is the credit score of a borrower, namely the total of a person’s credit history. Lenders look into this closely. Assets are equal to the sum of a borrower’s bank accounts, including IRAs, 401k accounts, and other tangible and liquid accounts. If you plan to apply for a stated income loan, be prepared to show your assets. Collateral is the value of the house, cars, or things that the bank will lend against.
In order to get a stated income loan, you must show the income amount you make per month on the loan application. Even though this amount does not need to be supported by documentation, you must ensure to be able to gain enough income to keep a low debt ratio. To maintain a good debt ratio, be sure your debt does not outnumber 30% of your stated monthly earnings.
Stated income loans can be granted to a borrower that fits the guidelines of a stated income lender.
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