HO! HO! HO! Holiday Loans
by: Iowa Legal Aid
Believe it or not, the holidays are right around the corner! Stores are dusting off their decorations and putting up displays. Tax preparation and check cashing operations will soon be dusting off their pay stub and holiday refund loan offers. Holiday or pay stub loans may seem tempting, but are they a good idea? Applying for a loan based upon your expected refund amount can be risky. It can encourage you to spend outside your budget for the holiday season.
Why Are The Loans Risky?
Scenario 1: Tax preparer overestimates your expected refund. Your refund is smaller than your loan. You will have to pay the difference to the lender.
Scenario 2: You owe child support or some other debt to the state or federal government. The tax preparer doesn?t know about this. Your refund will be used to pay these back bills and once again, you will be left in debt to the lender.
Scenario 3: You go back to the preparer to get your tax return prepared. You take out a refund anticipation loan to pay back your holiday loan. Your tax preparer has a cross-collection clause in its loan paperwork. Your refund is used to pay off an old debt to another bank. You are left owing the new loan fees and your entire refund is gone. You may not agree the debt was valid. Now you have to pursue the other lender to get your refund.
How Expensive Are Holiday Refund Loans, Really?
The loan fees can be $100 or more. This translates into an annual percentage rate (APR) of triple digits because the loan is short term. Some providers even require that you return to them for tax preparation. This can mean paying an additional $100 or more for preparation when you could get free tax preparation at a local Volunteer Income Tax Assistors (VITA) or Tax Counseling for the Elderly (TCE) site.
You can go to these free sites as soon as you get your W-2s and 1099s.Use e-file and deposit your refund directly into your bank account. Do this and you can get your refund in as little as 10 to14 days. You won?t have the extra money for the holidays, but you will have additional money to face those mounting utility bills in the winter months.
Take many financial experts? recommendations to heart:
- Resist the well-intentioned desire to overspend around the holidays.
- Set a realistic holiday budget before you shop and stick with it.
- Use your tax refund for paying down debt, keeping your utility bill current, or fixing your car.
If you take these steps, your holiday season shouldn?t lead to money blues in January.
For details about refund anticipation loans, getting more money in your paycheck, tax credits for families, or how to find local free tax preparation, visit www.iowalegalaid.org or call 1-800-532-1275 to find out which Iowa Legal Aid office serves your county.
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