When the new year rolls around, tax preparers set up shop and try to generate business. One of the ways they drum up that business is by offering refund anticipation loans to their customers. These refund anticipation loans promise fast cash and bigger refunds, but the reality is often quite different. Before you take out one of these loans, you need to watch out for these four red flags.
1 - Promises of a Larger Refund
The refund you get depends on a number of factors, from how much money was withheld from your paycheck to which tax credits you qualify for. While a good tax preparer may be able to uncover tax credits and other savings you may have overlooked, there is no legitimate way to boost your refund beyond that point.
Watch out for tax preparation firms that promise to increase the size of your refund. At best, those extra refund dollars could come laden with extra fees. At worst, the tax preparer could falsify information, underreport your income or even apply for tax credits you are not entitled to. Keep in mind that you are ultimately responsible for the information on your tax return, even if that return was prepared by a third party. In the end, it is simply not worth the risk.
2 - Promises of Instant Cash
Refund anticipation loans are often touted as a way to get your money quickly, but that instant cash often comes at a steep price. If you file your return electronically, you could have your refund in as little as 7 to 10 days. Unless you are in dire financial need, there is no reason to pay the high fees and interest rates associated with refund anticipation loans.
3 - High Fees
It might be nice to have your tax refund a few days early, but it is important to look at the fees you will be paying for that convenience. Many tax refund anticipation loans come loaded with all kinds of fees. These costs are often masked as administrative fees, but no matter what they are called they still come out of your pocket.
4 - Excessive Interest Rates
The interest rates on refund anticipation loans can be quite high, and those high costs can really eat into your refund. The interest rates on refund anticipation loans can be as high as 500 percent.
If you are thinking about a refund anticipation loan, it is important to check the interest rate disclosures carefully. These loans are short-term in nature, so you may need to annualize the interest rate to determine just how much that quick refund is really costing you.