Financial Resource Center


Refund loan scams prey on cash-strapped holiday shoppers

December 13th, 2006

WASHINGTON (12/14/06)--Just in time for the holidays, a new form of predatory lending will squeeze even more precious dollars from anticipated tax refunds of cash-strapped shoppers (Consumer Federation of America Nov. 28). Called "pay stub refund anticipation loans" (RALs) or "holiday RALs," these loans carry extremely high interest rates and are secured by and repaid directly from the proceeds of your tax refund. Holiday RALs are offered during November and December. Pay stub RALs are offered from Jan. 2 to mid-January, based on your most recent pay stub since you won't have received your W-2 in the mail yet. How expensive are these loans? Fees can be as high as $102, with triple-digit interest rates. Worse, you may get socked with a $50 "deposit" for services when making the loan. And watch out for so-called deals: H&R block is offering pay stub and holiday RALs at a 36% interest rate if you choose its debit card product, but you'll be charged an additional $25 if you opt to receive a paper check. The high cost of these loans is only one part of the problem:
  • Incomplete information. Loans are made based on estimated tax refunds before the W-2 with final tax information arrives in the mail. As a result, you may not know yet if the Internal Revenue Service is planning to seize part of your refund for back child support or student loan debt, and your final pay stub may not contain accurate information about pre-tax deductions such as retirement contributions.
  • Quick payback. You must repay most of these loans by mid-February. If your tax refund is smaller than expected, you may not have the funds to pay back the loan and all the fees and, if your payments are late, you run the risk of a ruined credit record.
  • Prevents shopping around. Some RAL issuers are forcing borrowers to return to the same tax preparer--and same office--for tax preparation, rather than seeking less expensive tax preparation services.
  • Exploits tax refunds of low-wage workers. Promises of quick cash against an anticipated refund are enticing, but they drain precious resources of those who can least afford the high fees and risks.
Steer clear of holiday and pay stub RALs. Know how much you can afford to spend on holiday purchases and stick to your budget. And when it comes time to prepare your taxes, low-wage workers can use the IRS Free File program or get free tax preparation services from a VITA site. VITA volunteers can help qualified taxpayers maximize Earned Income Tax Credit (EITC) benefits. For more information, read "Credits and Deductions Save You Tax Dollars" in Home & Family Finance Resource Center.