Anticipating Tax Refunds May Cost You
January means the start of tax preparation season and those W-2s should be landing on your doorstep any day.
For the hundreds of thousands of consumers who took out so-called pay stub loans, the arrival of the W-2 could signal an early financial reckoning, in addition to the one they still face on April 15.
A pay stub loan is a short-term, unsecured loan based on an estimated tax refund. It's the latest twist on tax refund anticipation loans and comes with a fee ranging from $40 to $70. Trouble can arise when the estimated tax refund on which a pay stub loan is based turns out to be wrong. The borrower, of course, is still on the hook.
Banking regulators in Maryland have misgivings about such loans and said last week they are taking a look at them. If the tax preparers are charging fees, they must have the right license and comply with Maryland's interest rate cap of 33 percent, according to Maryland Department of Labor, Licensing and Regulation Deputy Commissioner Joe Rooney.
Depending on the size and term of the loan, the fees translate into APRs that reach 70 percent, Rooney said. Consumer advocates contend the APRs can soar into the triple-digits.
The weird thing about pay stub loans is tax preparers themselves profess not to like them.
Last June, H&R Block chief executive Mark Ernst initially called on competitors not to offer pay stub loans, saying "the economics of the product have more in common with payday lending than refund lending."
Liberty Tax Service chief executive John Hewitt also disapproves of them and offered this example of what can go wrong:
Say a couple with a child splits up. Only one parent gets to claim the child as a dependent on his or her taxes. If it's not worked out ahead of time, whichever tax return the IRS gets first is the one that gets to claim the kid. That means the other parent can end up owing money instead of being owed some. Hewitt says this is a common scenario and "one of many types of errors that can occur" with estimated returns.
Hewitt says there aren't the same surprises with traditional tax refund anticipation loans because the money isn't given out until the return is filed and the IRS has accepted it.
(This is not to say that regular tax refund anticipation loans are a great deal either. Find more on the pitfalls of RALs here.)
So why did Liberty even offer a pay stub loan this year?
Short answer: It can't afford not to.
Jackson Hewitt was the first out of the gate with a product called the Holiday Express Loan Product (HELP). After hundreds of thousands flocked to Jackson Hewitt for HELP, H&R Block followed suit with a version called the Instant Money Advance Loan. Liberty's doesn't have a catchy name. Hewitt just called it a pay stub loan.
H&R Block charges a fee that depends on whether the consumer takes the loan in the form of a debit card linked to a bank account or as a check. The card comes with a finance charge of 36 percent. The check comes with a similar charge, plus a fee of $24.95. Liberty's version comes with a fee of about $40.
Hewitt said they're not a good deal for consumers. And he hopes they figure that out soon.
"I don't like the product and would like it to go away," he said.
Have you taken out a pay stub or tax refund anticipation loan? And have you been caught short after filing your return?
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