financial reflections

As I posted earlier, I’ve already filed my taxes. Total time from filing to refund? Two weeks. With that in mind, I’m constantly amazed at the number of people who take out refund anticipation loans.

The loans work like this: you pay a relatively small fee up front to your preparer when your taxes are done. You can then have a check, often instantly, but sometimes within 48 hours of filing with your preparer. Sounds easy, right? Walk in with a small check; walk out with a much larger one.

The trick is that the “fee” you pay effectively works out to high interest on a short term loan. The tax preparer is loaning you money and is going to use your tax return as payment. They electronically file your taxes, so they’re likely going to get that money back in two weeks, maybe faster.

With the loan happening over such a short period of time, the fee you paid works out to a very large interest rate on the money you walked out with. The rate is so high that refund anticipation loans have gotten some bad press, and have sparked a California lawsuit. Common sense says to wait the two weeks if you can.

And if you can’t wait the two weeks? That’s a symptom of real financial problems. You might want to ask yourself how you got into a situation where waiting two weeks couldn’t be avoided.

Also, you might want to stop using the IRS as a zero interest savings account. I’ve been guilty of that one more than once. This year, I adjusted my withholdings to get a smaller refund next year. The idea is to get a small refund, and use the extra money you get each paycheck wisely so you can avoid a taking out a refund anticipation loan next year.