Anticipation loans offer fast tax refunds, but at a cost (Franklin Park Herald-Journal)

By Mark Lawton
March 29, 2010

Many residents in Franklin Park and Northlake are getting their tax refunds back a little early but at a much higher cost.

Those residents use refund anticipation loans, essentially a loan against a person's tax refund.

The loans are available to anyone but tend to be used disproportionately by low-income individuals who are eligible for a large tax refund due to the earned income tax credit.

"It's much more prevalent in communities of color," said Tom Feltner, vice president of the Woodstock Institute, a Chicago nonprofit that focuses on financial issues in low-income communities and communities of color.

More than one-third of both Northlake and Franklin Park residents are Latinos, according to the U.S. census.

The anticipation loans take a few hours to a few days to process. Tax refunds by direct deposit, in contrast, take an average of 10 days.

The average cost for an anticipation loan for the 2006 tax year -- the last year records are available for, Feltner said -- is $104 to $111. Such loans also require having your taxes prepared by a professional, an average cost of $183 for those with a refund of $3,000. There may also be a check cashing fee and an application fee.

"When you see a high cost credit product concentrated in communities of color, you're seeing a disproportionate stripping of assets from those communities," Feltner said.

For the 2006 tax year, 11.2 percent of residents with low incomes in Franklin Park requested an anticipation loan, according to data supplied by the Woodstock Institute. Collectively, they spent an estimated $43,866 on fees for the loans.

In Northlake, 15 percent of residents with low incomes requested anticipation loans. Collectively, they spent an estimated $69,139 on fees for the loans.

Alternatives to refund anticipation loans include getting your tax refund by mail, getting your tax refund directly deposited into a bank account or, for a fee, getting your refund transferred to a debit card.

For taxpayers who do need their refund quickly, Feltner suggests they shop around on the anticipation loans.

"The best option is to steer clear of these loans altogether and go to a local credit union that has consumer credit loan options," Feltner said. "It's based on the ability to pay and helps you build a credit history."

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