Keep in mind the real cost of refund anticipation loan

Posted March 21, 2010, at 7:58 p.m.

The income tax filing deadline is less than a month away, and taxpayers who are expecting refunds may be planning what they will do with that money.

Those who felt they could not wait might have taken out what’s known as a refund anticipation loan, or RAL. Several major tax preparers offer the loans to clients who have refunds coming but want to put the cash to use ahead of time.

This year, they’re required to post signs stating the interest costs on such loans, an annual percentage rate of between 300 and 400 percent per year. That’s not a typo; that’s the range of such fees when computed on an annual percentage basis.

We’ve discussed RALs in the past, but in light of recent economic trends the message is worth repeating: Such loans generally cost much more than they’re worth.

RALs are illegal in some states; Maine is not among them. Maine has a relatively new law on the books that gives the state greater oversight into the practices lenders may and may not use.

That new law was passed during last year’s session of the Legislature. It was drafted in response to concerns that some lenders were behaving badly and consumers were being hurt as a result.

The law now requires lenders to do several things when they offer RALs. They must disclose in writing which fees they charge for preparing an individual’s taxes. Those fees must be the same for all customers, whether they sign up for a RAL or not. Also, lenders must disclose when the RAL will be issued.

Some oral disclosures also are part of the law, namely:

— The amount of the fee for the RAL.

— The RAL interest rate.

— That a RAL is a loan lasting only a week or two.

— That the consumer must pay the full amount of the loan, even if the refund is less than expected.

Maine law also requires lenders to tell consumers that they can generally get their tax refunds in eight to 15 days (when they file electronically) without paying extra fees or taking out a loan. The law also bans RAL lenders from a variety of collection and check cashing activities, forbids some abusive clauses in contracts, and bans advertising that doesn’t state the product is a loan.

The stakes are high. Across the country, the National Consumer Law Center estimates, people paid more than $738 million in loan fees in 2008. The center urges people to wait a few days for their refunds and save that needless expense.

That’s an argument some consumers just don’t want to hear. William Lund, superintendent of Maine’s Bureau of Consumer Credit Protection, said people will trade cold, hard cash to have a portion of their refunds in their hands a few days early.

“Consumers put an overly large benefit on speed,” Lund told me. He added that some consumers consider RALs a service by tax preparers, adding “we are seeing a good rate of compliance” with the new law.

You can find more information on RALs at the bureau’s Web site, www.maine.gov/pfr/consumercredit. A great hard-copy reference — on this and other topics — is the Consumer Action Handbook, available free from the Federal Citizen Information Center. Visit its Web site, www.ConsumerAction.gov, or call 1-888-878-3256.

Consumer Forum is a collaboration of the Bangor Daily News and Northeast CONTACT, Maine’s membership-funded, nonprofit consumer organization. Individual and business memberships are available at modest rates. For assistance with consumer-related issues, including consumer fraud and identity theft, or for more information, write: Consumer Forum, P.O. Box 486, Brewer 04412, or go to http://necontact.wordpress.com.

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