Knowledge Hoop

The holidays are over, but for many that may have overspent during Christmas shopping; the anticipation of receiving your 2011 W-2 forms may be mounting.  The people that I’m referring to are prime candidates for Refund Anticipation Loans.

According to the Consumer Federation of America (CFA), a RAL is a costly bank loan that is secured by a taxpayer’s expected refund, and carries an effective annual interest rate (APR) of approximately 149%.  This is almost five times worse than the default rate on most credit cards.  Believe me, I understand the desire to get your refund quickly, but you should never take out a loan to obtain money that’s owed to you.  Additionally, you should know that if the IRS reduces your refund for any reason, the entire amount of the RAL must be paid in full – hence, you will have to pay back the money out of pocket.

So, who are RALs targeted to?  According to the CFA, RALs are particularly targeted to low-income working families that claim the Earned Income Tax Credit (EITC).  In fact, over half of all RAL borrowers are EITC recipients – individuals that cannot afford to pay exorbitant fees to obtain their money.  Additionally, during a national survey commissioned by the CFA, it was concluded that RAL users are more likely to rent instead of own their homes; utilize high cost financial services, such as rent-to-own, payday loans and pawnshop loans; and a significant number of them are African American females.

Given the information above, I urge you to consider doing something different this year.  There are services available to help you get your money quickly, and without the excessive fees that are associated with RALs.  Included below are quick, cost-effective methods for obtaining your tax refund:

• In 2011, the U.S. Department of Treasury launched a pilot project offering low cost pre-paid debit cards to low-income families that are unbanked.  If you are reading this post and do not have a savings account, go open one!  You can’t be serious about taking control of your financial future if you don’t have this basic service.  Although there are low cost debit cards available, there are still fees associated with this service.  Take the first step toward making wiser financial decisions by opening a savings account.  Even if you’ve had trouble with banks in the past (i.e., overdrawn checking accounts) there are still many banks and credit unions that will offer certain services to you
• Visit the I-CAN! E-File site (www.icanefile.org) or the IRS site (www.irs.gov), and file your taxes for FREE on your own
• Visit a Volunteer Income Tax Assistance (VITA) or AARP Tax-Aide site.  They will e-File your taxes for you.  Tax-Aide sites save taxpayers money by eliminating the cost of RALs and tax preparation fees.  To find a location near you, call (1-800-906-9887) or visit www.irs.gov

Now that you know better, you should choose to make better choices. After all, why pay for something you can get for free? As you prepare to file your taxes, commit to the following:

1. Stay away from RALs and consider utilizing one of the tax preparation services noted above
2. Open a savings account if you don’t have one.  According to a study conducted by Insight Center for Community Economic Development, people of color are almost five times less likely than Whites to have a bank account
3. Deposit the fees that you would have paid on a RAL into your savings account to begin your nest egg.  According to CFA, the average fees for an RAL (including tax preparation fees) are  approximately $300

Remember, small steps can lead to significant change!