Monday, February 28, 2005

Refund-anticipation loans still a lousy deal--from Houston Chronicle

Personal finance tip: don't use refund-anticipation loans!
HoustonChronicle.com - Refund-anticipation loans still a lousy deal: "A refund-anticipation loan is a bank loan, short-term borrowing based on the amount you expect from your federal tax refund. It is also a popular marketing tool for the big tax-preparation companies, appealing especially to people living from paycheck to paycheck.... But for most people, 'they're completely unnecessary, an extremely expensive drain on expected refund money,' said Jean Ann Fox, director of consumer protection at the Consumer Federation of America.

....With classic refund-anticipation loans, consumers get their money in one to two days, Block spokeswoman Nancy Wagoner said. An instant refund-anticipation loan, which costs an extra $20, means you get the money the same day.

Either way, that translates into rates between 31 percent and 520 percent — that is not a typo — and that doesn't even count the $24.95 upfront fee.

The rates are somewhat skewed because the percentage is calculated on an annualized basis, even though the loan is outstanding for about 10 days. Still, you'll pay anywhere from $29.95 to $129.90....."

As I said, be patient,don't use these!

4 comments:

sshu said...

Tax refunds are a fascinating example of American savings behavior. What amazes me especially about these refund loans is that 1) individuals have overwitheld to give the government a free loan for the past year, and then 2) they turn around and pay huge fees to have their own money back a few weeks early. If I remember correctly, overwitholding (and receiving a refund) is far more common than underwitholding (and having to pay). Yet no one would ever express an actual desire to give the gov't an interest-free loan. The behavioral econ lit has explained it with loss aversion (having to pay), self-control, and/or mental accounting. There's still so much we need to understand about it though. One question I tried working on for a while - do people intend to put the refund into their savings, and then go spend it instead when it actually arrives? Just understanding this annual event could give us some interesting insights on general savings behavior.

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Alejandro said...

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