IRS Refund? Do NOT Take Refund Anticipation Loan

By George Gombossy | Last updated Feb 23, 2010, 9:41 am

Consumers who overpaid their income tax in 2009 and are anxious to get their refunds are the target of refund anticipation loan advertisements.

The Association of Independent Consumer Credit Counseling Agencies (AICCCA) says that consumers should resist the temptation of these loans and decide the best way to use the money for their personal financial situation. I totally agree.

The appeal of the refund anticipation loan is that consumers can get their money very quickly. While it does take about six weeks to get a refund for those that send paper returns via mail, consumers who file electronically and choose direct deposit can cut that time to 10 to 14 days.

The fee charged to get your money a few days sooner using a refund anticipation loan can be the equivalent of a 250 percent annual interest rate.

“Consumers who use refund anticipation loans will pay a hefty fee to get their own money,” said Dave Jones, president, AICCCA.

“Exercising patience and creating a plan for the best use of the money can make a difference.”

AICCCA offers three suggestions to use your refund wisely:

Pay down credit card debt. Look at your credit card accounts with balances due and determine which card has the highest interest rate. If you apply your refund toward that account, you will reduce and maybe even eliminate the amount you owe and you will not have to pay future interest payments or late payments on the card.

Another alternative is to see how many cards you could pay off, regardless of the interest rate, thus eliminating those bills from your monthly obligations.

Establish an emergency savings cushion. For many consumers, the reason for their high credit card debt is that they did not have the cash on hand to take care of emergency expenses, like car repairs or appliance replacement. If you don’t have a savings or emergency account, start one with your refund check.

The recommended goal of the emergency account is three to six months of bare bones living expense. This amount would cover your expenses if you lost your job, had to take a leave of absence from work or if you became seriously ill.

It will also enable you to take care of emergency repairs and replacements as they occur without incurring debt.

Invest for the future.

If you already have an emergency account, think about investing your tax refund into longer term, better paying investments. It is never too soon to start saving for college for your children or for your retirement. Use this opportunity to make savings a priority, so that you regularly pay yourself and watch your savings grow.

Finally, an annual review of your W4 form is a good idea if you regularly receive large refunds. Refunds give Uncle Sam an interest-free loan every year. Decrease the amount you are withholding by increasing your deductions and earn that interest for yourself.

Target this extra money for your savings account and check back in one year for the “refund” you won’t have to wait – or pay – for.

The Association of Independent Consumer Credit Counseling Agencies is a national membership organization established to promote quality and professional delivery of credit counseling services. AICCCA and its members are focused on financial education, efficient processes and advanced technology to best serve clients and creditors. AICCCA members are independent nonprofit agencies that advocate for debtors, annually counsel millions of consumers nationwide and provide debt management services to consumers with excessive unsecured debt.

To contact an AICCCA member agency call (866) 703-TRUSTAICCCA (866-703-8787) or visit www.aiccca.org.

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