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Tax Concerns
Tax Preparers Can Be Loan Sharks
By Michael Chadwick
President, Chadwick Financial Advisors
Be aware of potential loan sharks out there during the first few months of the year. Most people think of the Mafia, Mob or Gangsters when they hear the term loan sharks. Today we have corporate loan sharks who are operating within the law and charging consumers 7%, 10%, 70%, 700% on loans. These loan sharks are national income tax preparation firms who prepare taxes and offer “loans” in exchange for the anticipated tax refund due an individual. These products are often referred to as “Refund Anticipation Loans” and are nothing more than overpriced consumer loans. They are preying on people who want to get their refund right away. The typical refund anticipation loans charge a certain fee for the service. When doing the math, the fee is typically an astronomical interest rate.
Assume you were due a tax refund of $1108.00. The income tax firm may charge a fee of $75.00 for the loan. They may lend you the money today and have your tax refund electronically credited to their checking account in one week. If the loan were to last all year the effective interest rate would be about 7%. That is $75.00/$1108. Since the tax firm only made the loan for seven days, the interest rate is much, much larger than 7%. The actual interest rate on this loan is astronomically high. This rate is higher than any rate offered by any financial institution for virtually any type of loan. This is a poor business tactic being used by our nation’s tax firms. I suggest using a local CPA who is an expert in all aspects of the tax code. I’ve taken H&R Blocks income taxation courses and while informative, it gives me only a fraction of the tax law knowledge that any local CPA has. If you don’t have a CPA you know and trust, call in and I’ll be happy to recommend a few to you that I know and trust who will take good care of you.
Another version of the loan shark is the bank, but not where you think. Credit cards are cheap compared to this. Take a closer look at the ATM card and its associated fee’s. If you use your card to get $10.00 out of the bank and they charge you a fee of $1.50 and your bank charges you $1.50, you paid a total of $3.00 to get $10.00 or 30%. This transaction only lasted one instant so the annual rate on the ATM fee is ludicrous. Use the ATM only to get large sums of money and use it infrequently. Be sure to try and take advantage of free ATM usage any time you can. Try to avoid ATM usage where you are “captive” at places such as Universities, shows, theme parks, etc. Whenever you are a captive in an event or place, expect to pay top dollar for everything. Plan ahead and save some of your hard earned money.
Remember, those who understand interest collect it and those who do not understand it pay it. There are times when paying interest is a good thing, especially when the interest is low rate, tax deductible leveraged debt. Each financial decision you make should be geared toward building a mentality of being a good steward with your resources.
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