Why Tax Refund Loans Make Bad Financial Sense

It's getting to be tax season which means a slew of tax preparation companies will spring into action and in the process begin to push tax refund loans on consumers. Reports state that nearly 12 million Americans take companies up on these offers -- and fatten the bottom lines for return preparation companies in the process.

There are a few factors at work here. The first is that people love receiving tax refunds. However, say you receive a $2,150 refund. The important thing to remember is the government is really just returning the excess money you paid over what you owe. It's not free money -- its your money that you just gave to the government interest free for a year. Second, what the tax preparation companies tend not to advertise is that these loans are similar to payday loans and charge APR's often in excess of 100%. A $100 finance charge on an average refund of $2,150 has an APR of 178%.

If you are receiving a large refund you've already given the IRS a good deal, don't give the tax preparation firm an even better deal. If you use a tax refund as a way to force yourself to save money open an online savings account (ING, HSBC, and E*Trade all are easy to use and allow you to link multiple accounts). Take the amount of taxes you owed the previous year, divide by 12, and set up an automatic savings plan with the online savings account to regularly deduct a portion of that amount out of your checking monthly, weekly, or bi-weekly. This way you don't make an interest free loan to Uncle Sam and you are able to actually earn some interest yourself in an FDIC insured account.

Read more about Refund Anticipation Loans @ Wikipedia

Image: RBereig @ Flickr

Subprime Shakeout and Where it is Happening

The fallout from subprime lending defaults and other risky lending ventures made big news a few weeks ago, but now we are starting to get a clearer picture of the extent of the damage. Some resourceful bloggers have put the data into graphical form. The data floating around out there shows where the most subprime loans were made and also the locations where most are now in foreclosure.

For the most part the data isn't earth-shattering, because it seems that the most subprime loans were made around the major metro areas. I would guess this is because there are typically very wealth and poor people in these areas (or maybe just people in general). My theory is then that there were plenty of people buying more house than they could afford or investment property and also those who probably shouldn't have been offered a loan in the first place. However, that doesn't seem to always be the case if the maps are any indication. I'm not really sure what to make of these, but here they are...

Links
Dinocrat has some nice maps of subprime lending and subprime foreclosures

The Big Picture has a state by state subprime heat map that shows which states have the most subprime loans out there.

Department of Defense Tries to Cap Payday Loans

The department of defense has introduced a draft proposal capping payday loan interest at 36%. The potential law has recently been published in the Federal Register and the 60 day comment period has begun. I'm generally not much for Congress legislating things into submission, but something needs to be done about these shops. Capping rates at 36% would be a drastic cut from what most of these operations now charge.

The people who have helped push this legislation to the point where it will be considered claim that service men and women are particularly susceptible to these programs. While that may be true, I don't see why this legislation isn't extended outside the services. For every armed service member who falls behind and uses one of these services there are probably at least two or three average Americans. Service men and women nobly provide for our country, but they make a salary that is above the poverty line and have access to free or reduced education expenses. If they are running into this problem what about the inner city poor that these businesses thrive off? That's the end of my rant. If you want more information about why payday loan services are at least borderline unethical visit the FTC, Wikipedia, or Responsible Lending.

Links
DOD Legislation Story

FTC Payday Loans

Wikipedia Payday Loans

Responsible Lending