Avoid Holiday Loans

Have you heard about the newest loan product out there? It's the newest twist on those rip off refund anticipation loans, also known as RALs (something the major tax prep firms have been doing for years — after January first). They figure out your refund, and lend you that amount at a high interest rate. You pay them back when Uncle Sam's check arrives.

However, holiday loans are available in December. Instead of a W2 form, you bring in your latest pay stub. The tax firm estimates your refund and lends you that amount.

NBC reported,

"These holiday loans in particular are marketed to people at a time when they are probably most vulnerable," a consumer advocate with the Drum Major Institute for Public Policy in New York.

Consumer advocates have long criticized the tax season loans. Annual interest rates on RALs range from 40 to more than 700 percent, according to the National Consumer Law Center.

"They're offering a very bad product," says Griffith. "And what's worse is they know they're offering a bad product."

But there's another critic.

"In our assessment, this product is really not a good value for consumers," says Mark Ernst, CEO of H&R Block talking to investment analysts on Feb. 24, 2006, about holiday loans offered by a competitor, Jackson Hewitt. "This looks like another variation on refund loans, only worse. That was our judgment about it."

But H&R Block started making holiday loans, too, for business reasons.

"I mean, it's very clear to me, our intent is not to cede the early season to any competitors," says Ernst.

A Chicago research group thinks this kind of Refund Anticipation Loan is a terrible idea. According to the Chicago Sun-Times,

The Woodstock Institute said the holiday loans, combined with other refund anticipation loans taken at tax time, will eat away hundreds of dollars from individual returns.

"From the looks of this product, tax preparers are moving into the payday loan business," said Marva Williams, senior vice president of Woodstock. "We strongly urge consumers to stay away from these expensive loans this holiday season, just as they would avoid a payday loan."

As I have said so many times in this blog, as have a number of financial advisers that I follow, you can not get ahead and build real wealth, by borrowing.