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U.S. income tax returns must be in the mail by Monday, but most people who did not have to pay more into the system have already filed. Many folks who expect refunds got the money faster by getting refund anticipation loans, or RALs. Mother Jones explains how refund anticipation loans work, by looking how John Hewitt, founder of Jackson-Hewitt, got into the loan business. The RAL was invented by Ross Longfield in 1987.
Ultimately, Longfield persuaded H&R Block to sign up. But no one was as smitten as John Hewitt—who understood that people earning $15,000 or $20,000 or $25,000 a year live in a perpetual state of financial turmoil. Hewitt began opening outposts in the inner cities, Rust Belt towns, depressed rural areas—anywhere the misery index was high. “That was the low-hanging fruit,” he says. “Going into lower-income areas and delivering refunds quicker was where the opportunity was.”
Customers wanting a RAL paid Jackson Hewitt a $24 application fee, a $25 processing fee, and a $2 electronic-filing fee, plus 4 percent of the loan amount. On a $2,000 refund, that meant $131 in charges—equivalent to an annual interest rate of about 170 percent—not to mention the few hundred bucks you might spend for tax preparation. “Essentially, they’re charging people triple-digit interest rates to borrow their own money,” says Chi Chi Wu, a staff attorney at the National Consumer Law Center.
A few hundred bucks for tax preparation? Really?
“These businesses are in this neighborhood for one reason: They see they can make a killing here,” says Ramon Dalmasi, an accountant with a front-row seat on the growth of the instant tax business. Dalmasi opened a bookkeeping business in the Bronx in 1997 and watched as chain after tax-prep chain popped up on commercial strips in his community. A few years ago, he relocated to Yonkers, an aging suburb just north of New York City, and found the same chains there as well. “They don’t see people struggling to put food on the table,” he says. “They just see people who can make them millions.” Even without a RAL, a working parent who qualifies for the EITC often pays $300 or more at a tax mill. Dalmasi, a CPA who teaches accounting at nearby Lehman College, charges that same client $75 or $100. “Why should I charge anything more than that,” he asks, “when it’s taking me 20 minutes?”
I have four different types of income from many small sources and a family of six, but my CPA only charges $100. The article points out how the poor are being taken advantage of, but as some have said elsewhere, this type of loan is still preferable to organized crime loans. Link -via Metafilter, where there’s a lively discussion on this article.
(Image credit: Joshua Lutz)
See also: Why Do People Fall For Payday Loans?
Payday loans can have a annual interest rate of 400%, but people who take them don’t look it it that way when they borrow $100 and pay back $115 in two weeks. Many fall into the trap of taking a second, third, or more loans to cover the shortfalls caused by the previous loans. University of Chicago economists Marianne Bertrand and Adaire Morse ran an experiment in which they explained the terms of payday loans in detail, and gave statistics on how the average borrower must continue getting loans.
In a nationwide experiment, Bertrand and Morse found that providing a clear and tangible description of a loan’s cost reduced the number of applicants choosing to take payday loans by as much as 10 percent. Better information, it turns out, may dissuade borrowers vulnerable to the lure of quick cash while maintaining the option of immediate financing for those truly in need.
Among the other 90%, some won’t change their behavior no matter what, but many have no other credit options available. Link
