Tuesday, February 15, 2011

Who takes out those "instant refund loans"?

Answer: a lot of folks! One in seven taxpayers who filed a 2008 return took advantage of a "bank product," the euphemistic name for a Refund Anticipation Loan (RAL) or a Refund Anticipation Check(RAC).

A newly released Treasury Department study has some answers, based on analysis of millions of tax returns by the Tax Policy Center:

Not too surprisingly, users of RALs and RACs were more likely to be:

lower income
young adults
single head-of-household filing status
recipients of Earned Income Tax Credit
users of paid preparers

However, the study found that the balance has been shifting in recent years, as more taxpayers have switched from the very high cost RALs to the lower cost RACs:

The shift was especially marked among active duty military taxpayers, after recent legislation put a cap limiting the APR interest rates that could be charged to military families, which drastically reduced the profitability of offering RALs to such families.

The decrease in RALs is likely to continue as bank regulators make it clear that they take an increasingly dim view of such products, and the IRS discontinued its facilitation of that business by removing the "debt indicator" from the acceptance reports it issues to efile providers.

There are fascinating geographic differences in the prevalence of bank products, as the map below shows:

In general, the study found that a low-income taxpayer living in a high-density poverty area is more likely to use a RAL than a similarly low-income taxpayer living in an area with lower poverty rates.

Hat tip: Trish McIntyre