Tax-refund loans are no deal

I don't know why -- maybe it's the blinding winter light -- but January seems to be the month of hidden hazards.
Things like black ice on the roadway. Football teams that inspire hopes, then dash them. And tax preparers who want to take an unnecessary bite out of your income-tax refund.
There's not much you can do about the first two, beyond keeping your speed down and your wagers small.
But with a little vigilance and planning, you can easily avoid the pitfalls of "refund anticipation loans," or RALs, a bad idea that just never seems to go away.
RALs are most often a peril for the poor and working class -- anyone who lives paycheck to paycheck -- but the pitches for them don't discriminate. Anyone who uses a commercial tax preparer such as H & amp;R Block will probably be offered the option.
Terms of the deal
What do products such as Block's "Instant Money" provide? Despite more than a decade of pressure from consumer advocates, the idea is basically unchanged: You get your refund a few days earlier, minus a substantial cut for the tax preparer and the lender with whom it partners.
How big a cut? The answer is breathtaking, especially when you consider that the IRS itself now offers a way to get your refund -- all of it -- within 10 to 14 days.
More on that in a moment. With W-2s due to be delivered by employers sometime over the next several days, now's a good time to take a closer look at just how much RALs cost.
Here's what you'll pay for a $2,000 refund anticipation loan from Block:
U$24.95 to set up a temporary bank account -- it's used only for the RAL.
U$45 in interest on the $2,000 loan. (Finance charges range from $5 for a loan of $200 to $500, up to $75 for a loan of $2,001 to $7,000.)
UAn administrative fee ranging from $28 to $59, which Block says averages $32.
In other words, that $2,000 loan could easily cost you more than $100 or $125.
If you get the money 12 days faster than the IRS would get it to you, the annual percentage interest rate you'd pay would range from 152 percent to 190 percent.
Of course, you'll never see APRs like that in statements from Block. The company excludes the bank-account fee and the administrative fee from its Truth in Lending Act disclosures, saying they don't count as interest. Even with that omission, Block says the annual rates on its RALs range from 34 percent to 129 percent.
Additional fees
Enough to scare you off yet? If not, consider this: You can pay even more for "Instant Money." For an extra $15 fee, you don't have to wait the one or two days for a standard RAL. Pay the extra fee, and you'll get your money by the end of the business day.
By the way, aside from disagreement over what should go into the APR calculation, Block is generally upfront about its fees, perhaps because of all the litigation and agitation against it -- including picketing around the country this month by the community group ACORN.
The company's chief defense is that it isn't hiding anything. It lays out all the options for its clients, and even discourages them from choosing RALs.
"We want our clients to choose another option," spokeswoman Denise Sposato said. "But we know some of our clients want or need this option. And no one can make the decision for them."
The best option
There's certainly plenty of proof that Block and its competitors have a willing market for these loans.
Which brings us to the smart solution to the problem presented by overpriced RALs: Filing a tax return electronically, and having the refund deposited directly into a permanent, not temporary, bank account.
Sound too daunting? Help is available, from tax-prep companies -- including H & amp;R Block -- that are part of the IRS's "Free File" alliance (www.irs.gov; click on "1040 Central").
XJeff Gelles is a columnist for The Philadelphia Inquirer. Write to him at: The Philadelphia Inquirer, P.O. Box 8263, Philadelphia, Pa. 19101 or e-mail consumerwatch@phillynews.com.