As tax season approaches, predatory tax refund anticipation loans flourish

Inside Subprime: January 12, 2018

By Alex Huntsberger

Most predatory loans are a year-round proposition. After all, you can take out a no credit check loan or a payday loan any day of the week, any week of the year!

But predatory tax advance loans? Those are a little different. These dangerous cash advance loans are a menace confined to a specific part of the calendar, like Krampus or the cast of Floribama Shore.

As Americans across the country begin receiving their W-2s and start the long and arduous process of filing their taxes, the wait for a tax refund can get a bit tedious. As a result, tax refund anticipation loans are popular this time of year, as they promise to do away with the delay altogether! In return for a fee and/or interest charges, borrowers can get their money instantly, then use their tax refund check to repay the loan when it eventually comes in the mail.

This sounds great, and some tax refund anticipation loans are legit, in that they’re provided by trustworthy lenders with your best interest in mind, and provide a helpful service to borrowers with subprime credit and nowhere else to turn. But nabbing a loan like this from even the most responsible lender might not be the best idea, because they take out fees and interest and leave you with less money in the end. Why get some of your money now, when you could wait a bit a get all of your money later?

Additionally, predatory tax refund anticipation loans charge the kind of sky-high interest rates associated with payday and title loans. Not only will taking out a tax refund loan dramatically reduce the amount of money that you take home at the end of the day, they can, and often do, trap borrowers into a dangerous cycle of debt.

Take the lawsuit filed last year against a New Mexico tax refund lender. The company was charged with preying on financial vulnerable members of the Navajo Nation and charging interest rates as high as 385 percent.

There are three entities defendants in the case: T&R Market Inc., Tancorde Finance Inc and T&R Tax Service Inc. The suit alleges that these entities, all part of the same business, “imposed hidden charges, deceptively understated [the interest rate], and engaged in other unlawful and deceptive conduct.”

The company has several locations around the Navajo Nation reservation in New Mexico, and is accused of purposely targeting the native population specifically.

New Mexico has been in the news lately for taking a very strict line on payday and other predatory loans. In recent weeks, a bill was introduced in the state legislature would allow state employees to access affordable loans against their future paychecks, and on January 1, a statewide cap on storefront loan interest rates mans lenders can only charge up to 175 percent on small, short-term loans. While this is still much more than the 36 percent cap many other states have enacted, consumer advocates say it should save cash-strapped New Mexicans upwards of $500 million in interest and fees over the next two years. 

Unfortunately, as many states take a harder line against predatory bad credit loans, tax refund anticipation loans are one of the many products that exist in a lending loophole. These loan products get away with charging insane interest rates because they’re tied with tax season, and they will rise to take the place of other predatory lenders if the chance arises. 

If you’re thinking about taking out one of these loans to get your refund faster, don’t do it! If you file your taxes ASAP, you’ll likely get your refund via direct deposit within a couple weeks. Get all the money you are owed, and steer clear of a potential debt trap.

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