Families who fail to save money for the holidays risk falling deeper into debt trying to manage holiday spending. Income tax loans are one of the worst ways to raise quick cash for the holidays, yet thousands flock to providers that promise quick cash at horrendous terms.
Income tax preparation firms specialize in fleecing lower income tax filers out of money meant for their growing families. They dangle the carrot of holiday cash in front of those who are fearful of disappointing their families.
These are often marketed as holiday tax loans, but they are essentially income tax refund anticipation loans (RALs). RALs are notorious for having effective interest rates of up to 700% APR, making them potentially more expensive than payday loans which average 391% APR.
Holiday tax loans are still available, but there are fewer lenders willing to make them. This makes it difficult for the largest income tax preparation firms (Liberty Tax Service, Jackson Hewitt, H&R Block) to offer these loans, since national lenders that specialize in backing these loans have been squeezed by IRS challenges and regulatory issues.
The Internal Revenue Service has ended its debt indicator, making it difficult for a tax lender to confirm that the tax filer has no tax liens or other government garnishments pending. This increases the risk of the loans.
Also, the Comptroller of the Currency has pressured banks to stop providing these loans. This action was in response to the IRS action, as it makes these types of loans risky to any institution that provides a high volume of such loans.
Despite the challenges, there are lenders that will make holiday tax loans, and there are tax preparation firms that partner with them to provide thes loans. If you are bound and determined to borrow against your anticipated tax refund no matter what the cost, you should have very little trouble finding a predatory lender that is willing to comply.
If you choose to borrow money at high cost, make sure that you have a plan in place in case you are put in a difficult position where your income tax refund is intercepted by a government agency. You could be on the hook if you have unpaid child support or a defaulted student loan.
Given these changes, holiday tax loans have been more difficult to obtain since 2010. You may have to search a little longer to find a tax preparation firm that has partnered with a provider.
Most importantly though, if you are tempted, first look to see if you have any better lending alternatives. Perhaps your credit union or community bank has a cheaper borrowing option. Anything is better than taking the plunge into a murky situation that is difficult to escape from!
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."