In 2010, H & R Block was the leading provider of refund anticipation loans (RALs). These loans are provided by a tax preparation company after they have filed a consumer’s taxes and essentially “loan” the consumer their own tax refund in return for the consumer to pay hefty interest rate of approximately 24%. There is also an upfront fee. In addition to refund anticipation loans, H & R Block offered refund anticipation checks which allowed the tax filer to pay for their tax preparation service out of their refund instead of paying upfront. In 2010, H & R Block reported that 45% of their customers paid for one or both of these services. H & R Block earned 146 million from these services in 2010 alone. (Chicago Sun-Times) However, in 2011, H & R Block was unable to offer RALs because their partner bank was ordered by federal regulators to stop funding those types of loans. While other tax preparers such as Jackson Hewitt did offer RALs in 2011, H & R Block did not suffer a loss of customers as feared after losing the ability to offer RALs. Instead, their business grew last season, and they have decided not to bring back RALs for 2012.
Refund anticipation loans are controversial because they charge customers, many of who are low-income, a high interest rate to essentially borrow their own money. These types of loans were first offered approximately 20 years ago, but since then the need has declined as more and more people file their taxes electronically, which can result in a refund turn around time of 7 to 10 days if the tax payer opts for direct deposit.
However, an estimated 25% of Americans do not have a checking account, which is why RALs still are appealing to them. Even with electronic filing, if a tax payer does not opt for direct deposit because they do not have a checking account, they may have to wait three to five weeks for their refund check. Some people rely on their tax refunds to pay off their bills from Christmas shopping or to pay other bills, so they want their money quickly.
Yet, RALs can end up costing the tax payer 10% of their anticipated refund once high interest fees and other fees such as a check cashing fee are included. (Wisconsin Department of Revenue) One of the best things a tax payer without a checking account can do is to open a free checking account at a bank or credit union so they may opt for direct deposit and get their refund in less than two weeks without paying the expenses related to an RAL.
The IRS has had some discussion of eliminating RALs due to their high fees and the concern that low-income tax payers are being targeted and profited from. Yet for now, they are still legal, but declining in popularity, as evidenced by H & R Block’s continued tax filing growth, even without offering the expensive convenience of refund anticipation loans.