2009-03-06 / Community

Pheffer: Beware Of Refund Anticipation Loans

Asemblywoman Audrey I. Pheffer has reminded taxpayers to consider their options before taking a Refund Anticipation Loan.

"In the midst of the country's worst recession since the Great Depression, many New Yorkers are having trouble making ends meet. Given this tough economic climate, it is especially tempting to want your tax refund instantly. But think twice before falling prey to refund anticipation loans, commonly called RALs, which provide you money up front, for a very steep fee," said Pheffer.

RALs are short-term loans made by banks through tax preparers and secured against the taxpayer's expected tax refund. The annual percentage rate tax preparers charge for RALs can range anywhere from 50-700 percent. Taxpayers can also face additional charges if their refunds don't arrive when expected.

According to the non-profit National Consumer Law Center, RALs drained the refunds of almost 9 million Americans in 2007, costing them $833 million in loan fees and $68 million in related costs. That means about 1 in 15 tax returns involved a RAL.

xsd"While the majority of tax preparers are trained, experienced and conscientious professionals that provide consumers with the information necessary to make informed decisions, it has become apparent that some consumers are not being well served. This new state law helps better educate the consumer on tax preparation practices, including Refund Anticipation Loans (RALs). RALs are often misrepresented as an "instant refund" to consumers rather than the high-interest rate loans they actually are," said Pheffer.

The new statute requires paid tax preparers to provide their customers with a "Consumer Bill of Rights Regarding Tax Preparers" to be created and distributed by the Department of Tax and Finance.

The new law also prohibits refund anticipation loans (RAL) from being advertised as a refund and require advertisements for RALs to conspicuously state that it is a loan, that fees and interest will be charged, and include the name of the lending institution. In addition, the law requires tax preparers to provide a specified written disclosure to a consumer prior to entering into a RAL including information on the nature of the loan, the estimated annual percentage rate of the loan, RAL costs and fees, and the estimated time the customer can expect to receive his or her refund under different circumstances, including if the tax payer elects to file for and receive his or her refund electronically.

"Families who earn little are particularly targeted. Nearly two-thirds of RAL borrowers receive the Earned Income Tax Credit, a special tax break for lowincome workers. Tax preparation companies push RALs to low-income families, promising immediate access to their desperately needed refund," said Pheffer. "When a family feels it has nowhere to turn and needs money to pay overdue bills, RALs seem like the perfect fix. But they aren't. The high interest rates and various fees charged for these loans take money out of your pocket and may cause additional credit problems down the road. Today, the government processes tax returns much more quickly than even a few years ago. Be patient and don't pay needlessly to get money that is rightfully yours."

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