Refund Anticipation Loans Part 2

In January I wrote this post about how tax prep firms were getting into the Refund Anticipation Loan (RAL) business.

Now, according to this NY Times article, fewer people are making this financial mistake. Apparently the number of these loans has decreased 22.5%. All I can say is THANK GOD! These loans made me sick because they allowed people who know better to prey on those who don't. Lack of knowledge isn't a great excuse, but there is a level of trust involved when someone hires a financial professional of any sort (tax, investment, etc.). People assume that the person they're hiring isn't going to screw them over. Unfortunately that is what often happens.

The solution? Education! Education! Education! I keep talking about it, eventually I'm going to do it. I want to start a non-profit that is dedicated to getting financial education in our school systems. Until that happens though, I call on all of you! Particularly those of you who have kids. Get involved with your kids school and get the parents together to lobby for financial education requirements. The squeeky wheel gets the oil so come on people! Squeek loud!

Personal Finance 101 Posts of the Day 3/26/07

• All Financial Matters has a great summary of why renting furniture is a bad idea. I agree 1000%. I've said it over and over that financing a depreciating asset (car, computer, furniture, jewelry, etc.) is always a bad idea. The value of the product drops so quickly that it's guaranteed that you'll be upside-down on the loan almost immediately. It's a much better idea to save up your money and buy with cash. This is why you set financial goals, to plan for these purchases.
• Credit Card Lowdown lists 20 moronic things people do with credit cards.
• Money for the Rest of Us talks about how to find cheap flights.
• Broke-ass Student talks about things to watch out for with credit cards.

Personal Finance 101 Posts of the Day 3/19/07

• Raising 4 Boys gives great suggestions on how to handle allowances.
• Story3girl wonders what money’s for.
• Getting Green talks about payday loans.
• Ask Mr. Credit Card talks about why buying a used car was a good idea.
• The Skilled Investor reminds us not to rely on past performance when choosing investments.

Be careful with those balance transfers

Young and Broke did a great post about Balance Transfer Boo Boos.

Balance transfers can be great but there are definitely some things you want to look out for and Y&B covers the main 5. Those who are playing the balance transfer game (whether it's to pay of debt or earn money) should definitely check it out.

Borrowing money to pay off debt

War On Credit Cards posted a discussion about whether you should borrow money to pay off debt. They are in support of it if you can get reduced rates on your debt and I agree with some of their points. The biggest concerns I have are when people do the following:

1. Trade unsecured debt for secured debt by using money from a HELOC to pay off credit cards. There are advantages and disadvantages to this, the main being: you get a lower rate but you potentially put your house on the line. My biggest concern with this method is, if you haven't learned your lesson, you can put the debt on your HELOC and then you run up your credit cards again compounding your problem. There's also the problem of, if you hit a financial rough spot and can't pay your HELOC payment, with credit cards they just trash your credit but with a HELOC they can take your house. It can be dangerous so keep that in mind.
2. Borrow money from a 401(k) or 403(b). It sounds like a great idea because you're paying interest (at a low rate) to yourself. However there are some dangers. First, if you lose your job, most likely your loan is due within 60 days and if you can't pay it, it's considered a taxable distribution and you have to pay taxes and penalties. Second, many times if you have an active loan you can't make additional contributions. This may mean that you miss out on employer match. It definitely means that you miss out on the ability to contribute (you can't replace missed contributions) which can drastically reduce the money you have in retirement since you also lose all of those earnings. Third, as in the second example, when the money is out of your account for the loan it isn't earning for you and you can never replace the benefits of those compounded earnings which could have a much larger impact on your financial future than carrying credit card debt.

So, basically, if you're borrowing money from credit cards or prosper or something similar in order to get a lower rate then go for it. However, if you're borrowing from your house or retirement, please, think long and hard because if something happens you can really do serious damage to your financial future.

Refund Anticipation Loans

Today Personal Finance Advice posted about how tax preparers have become loan sharks. It's a great article and a disturbing trend. It takes advantage of those who don't have the knowledge to manage their own money when that group is the one that needs the most help.

Anyone who has met me or has been involved in one of my forum discussions on the topic knows that I abhor payday loan companies. They're sneaky, underhanded and take advantage of people. Their rates are usury and they only get away with it because they charge "fees" instead of interest.

These Refund Anticipation Loans (RAL) seem to be the new payday loans. Lots of states have started coming down on payday loan companies and I hope these RAL companies are soon to follow. I guess it makes sense though. Face-to-face companies have started losing a lot of business because of online filing software but hopefully they'll come up with a better solution than completely screwing the consumer. I suggest you boycott companies that offer RALs and read Boston Gal's posting on how to get DIY tax preparation software for cheap. Then you can do it yourself and get your money back quickly and cheaply.