Every year around tax time, we can expect a healthy dose of advertising by tax preparers about how they can guarantee the highest refunds, the fastest refunds, and audit protection. One product that makes them huge profits is a refund anticipation loan. After you’ve worked with a tax preparer to finish your return, they will undoubtedly ask if you’d like to receive your refund even faster. Everyone wants to get their money faster right? Just beware the very expensive catch.

Refund anticipation loans are extremely expensive because you have to pay fees, such as application and administrative fees, for what amounts to a very short term, very safe loan. With electronic filing, a tax preparer knows whether there are any problems with a return within twenty four hours of electronic submission. If the return is free from math errors, then the IRS will usually pay out the return within a week or two, barring inconsistencies with other forms like your W-2 or 1099-INTs. If you opt for direct deposit and you electronically file, you can get your return in as quickly as a single week.

In 2004, 12 million people got RALs and the average was an effective 178% interest on a 10 day loan (based on the average refund size of $2,150) according to the NCLC/CFA 2006 Refund Anticipation Loan report. In the current economy, with people strapped for cash, I wouldn’t be surprised if all the numbers in that sentence were to increase.

When you consider that current savings account rates are less than 2%, paying 178% looks even more absurd. Instead of getting a RAL, do your taxes as early as possible! You have almost all the information you need by the time February ends, so if you are due a refund, file immediately. If you are really in a pinch, consider borrowing some money from friends and family before you pay ridiculous fees to a tax preparer!

Finally, even if they don’t say “refund anticipation loans,” you might be signing up for one if they promise to give you your refund immediately. Last year, mystery shoppers exposed deceptive RAL practices at many popular tax preparers.

Beware refund anticipation loans in sheep’s clothing.

Jim writes about personal finance at Bargaineering.com.

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