McNay on Money

The Season for Tax Refund Rip-Offs

By: Don McNay
By: Don McNay

Tax refund loans (also called refund anticipation loans) are in a class of financial products marketed primarily to poor people.

Tax refund loans (also called refund anticipation loans) are in a class of financial products marketed primarily to poor people.

Someone described tax refund loans as a payday loan guaranteed by your tax return. That hits the nail on the head.

Like payday loans, the fees and interest rates on tax refund loans are outrageous. According to the San Francisco Chronicle, the annualized interest rate for tax loans is 40% to 500%.

According to IRS data, 8.7 million people took out a tax refund loan in 2007. Of those 8.7 million who got the loans, 67% received an Earned Income Tax Credit.

The Earned Income Tax Credit is a program aimed to help the working poor. Only 17% of all taxpayers get it.

When 2/3 of the borrowers come from less than 1/5 of the population, it doesn't take a genius to see the business model. Tax refund loan vendors must view the working poor as easy pickings. They are probably right.

In the modern era, with electronic transfers, it only takes a week or two to get a tax refund from the IRS. People getting loans are those who won't wait two weeks for their money.

Tax refunds come in once a year. It is not money people are living on week to week.

There is something seriously wrong about a society where 8.7 million Americans will pay $1 billion in fees and interest rather than wait two weeks for a check.

It's a mindset of immediate gratification that tax refund companies are able to exploit.

There is no reason for tax refund anticipation loans to exist. The industry targets a poor audience, charges high fees and provides a "service" that is not really a service. People wait all year for a tax refund. They can wait another two weeks or so.

Gary Rivlin's award winning book, Broke USA, is a must read. It's a primer on how the "poverty industry" came to be and what to do to stop it.

Of all the poverty industry products, tax refund loans have to be the worst.

Read More Blogs
Comments are posted from viewers like you and do not always reflect the views of this station.
powered by Disqus

WKYT

2851 Winchester Rd. Lexington, Ky 40509 859-299-0411 - switchboard 859-299-2727 - newsroom
Gray Television, Inc. - Copyright © 2002-2014 - Designed by Gray Digital Media - Powered by Clickability