Tax Refund Loans: Don't Mortgage Your Future

Editor's note: As a special feature for March, TheStreet.com offers an ongoing series on everything you need to know about taxes. Today is part nine.

For many Americans, tax refund day is a holiday on par with their birthday or Christmas. Some people are so anxious to receive the check from Uncle Sam that they spend it before it even arrives. However, taking on debt in anticipation of a tax return is not a decision to be made lightly.

Money Management International, a nonprofit credit counseling agency, recently published its 2007 Tax Survey results and uncovered some encouraging trends.

According to the survey, 32% of Americans plan to put their tax refund in savings. Another 46% will use the money to take care of obligations such as car repairs or outstanding debt. Others will use their returns in less noble ways. But Tanisha Warner, spokesperson for MMI, says "that's not necessarily a bad thing as long as you have a plan."

More Money Than Brains

Unfortunately, many people don't even have a plan. And they don't think about the consequences of what they do with their refund. If they did, high-cost refund-anticipatory loans (RALs) offered by tax preparers and some banks would go the way of the dinosaur.

Instead, the Consumer Federation of America says 9.6 million American taxpayers spent more than $1 billion on this costly form of credit in 2005 (the latest year for which data were available).

To understand what a rip-off these fast-cash offers can be, consider this: The CFA estimates that you could end up paying as much as $111 on a RAL for a $2,500 refund. That's an effective APR of well over 100% for a two-week advance, and it doesn't include the tax-preparation and application fees some lenders will charge.