THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, January 9, 1995 TAG: 9501070191
SECTION: BUSINESS WEEKLY PAGE: 11 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY DAVE MAYFIELD, BUSINESS WEEKLY, STAFF
LENGTH: Medium: 59 lines
Why would anyone pay interest rates of 100, 200, 400 percent or more for a loan?
Where refund-anticipation loans are concerned, all logical thinking about how to manage money often goes out the door.
The loans, also known as RALs, give taxpayers who use tax preparers to file their returns electronically a way to get back most of what they're owed by Uncle Sam, usually within a day or two.
Most'' is the key word here.
That's because the refund loan is reduced by fees charged by the bank that makes the loan and the tax service that originates it. By keeping the full refund for themselves when it's cleared by the IRS a few weeks later, they make a profit on the loan.
Lend $1,500. Keep $1,600 or $1,700. In a nutshell, that's how the RAL business works.
Why not do all the work and keep the full refund for oneself?
That means sweating over tax returns and waiting longer for refunds to come in - perhaps six weeks or more. Many people truly can't wait. But with better planning, tax preparers say, many others could.
Andy Slizewski, co-owner of Fastax Inc., a Virginia Beach-based tax service, said he tries to talk people out of RALs.
``I could show you some annual percentage rates that would just knock your socks off,'' Slizewski said.
On one $449 loan he originated last year, the taxpayer paid an annual percentage rate of 272 percent after fees were subtracted from the refund.
The problem is, ``A lot of people don't know how to manage their money,'' he said. ``They make $10 and they spend $11.''
A big enticement of RALs is they require no out-of-pocket fees up front. That helps people who scrape by financially.
There are other, cheaper refund products available through tax services that get money into the hands of taxpayers who file electronically within a few weeks. Many tax preparers expect those products to become more popular this year.
But Harry James, co-owner of James Financial Services Inc. of Virginia Beach, said he expects RALs to stay popular too.
``It's a service that people want,'' he said. ``Why do pawn shops work?''
Steven R. Dickey, chief operating officer for the Virginia franchise of H&R Block Inc., said his tax service ``always tells people there are other alternatives. But we just seem to be a society that says, `the quicker, the better,' even if we do have to pay more.'' ILLUSTRATION: Color staff photo by Tamara Voninski
Harry James, co-owner of James Financial Services Inc. in Virginia
Beach, and Shelley R. Saenger, a certified public accountant to the
firm.
by CNB