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At tax time, most Americans find themselves expecting a refund. That's no surprise, as most people have too much money withheld from their paychecks. It would be a simple matter to adjust the withholding so that the amount of money withheld is roughly equal to the amount of tax owed, but most people are content to get a refund check every spring.
Until relatively recently, when a taxpayer had a refund coming, he or she had to wait two months or so while the refund was processed and the check mailed. In recent years, however, major tax preparers have come up with a profitable alternative that keeps the taxpayer from having to wait so long – the Rapid Refund.
The rapid refund, also known as a refund anticipation loan, is a loan given by the tax preparing company that is backed by the refund itself as collateral. The taxpayer that agrees to the service will receive his or her refund, less a service fee, often in as little as 24 hours.
On the surface, this might seem like a great idea. Pay a fee, and get the refund now instead of later. But there are some problems with this service that many people either don't know about or overlook:
# The fees are high; they average about $100 per refund.
# When the fees are considered as interest, the interest rate can amount to more than 500% annually, a rate comparable to those of payday loans.
# The people who elect to take the rapid refunds are often the people who can least afford them, so the process tends to take advantage of the poor.
# The fees you pay for the rapid refund aren't getting you your refund that much faster Professional tax preparers usually file returns electronically, so the refunds, without the extra service, can often be had in as little as ten days..
# You are paying someone to lend you your own money!
If you really, really need your refund quickly and you don't mind paying a hefty fee to get it a few days sooner, then go ahead and buy the rapid refund. For most people, however, the service is a poor investment.