What is a tax refund loan and why are they such a terrible idea?

Ralph
00:00:00

It's almost time to start filing those tax returns. And let me ask you a question. Are you desperately waiting for your tax refund?

Maybe you've seen those tempting instant refund offers at tax preparation offices and you're thinking, I could really use that money now. But listen, before you sign on the dotted line, let me share something that could save you from a costly mistake.

Join me today as I explore why a tax refund loan may be a terrible idea. That's exactly what I'm going to cover on today's show.

Podcast Announcer
00:00:30

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope.

Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth. To break the bondage of financial despair.

To get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph
00:01:10

Welcome to the show. I'm thrilled to have this opportunity to help you navigate your financial journey while growing stronger in your faith.

That's what I do every day here on the Ask Ralph Show. Now, if you missed yesterday's show, we talked about how to buy your first home.

And, and we covered some essential strategies that could help make your dream of homeownership a reality. So if you missed that show, I'm going to encourage you to go check it out.

And all of our back episodes are right @ askralph.com well, today's listener question comes to us from Ohio and this comes to us from Jessica. And this is what Jessica sent me.

She said, dear Ralph, Last week my 6 year old daughter Kassidy needed emergency dental surgery and my car's transmission gave out on the way to her appointment. I'm expecting a $4,800 tax refund, but it won't come for several weeks.

The tax preparation office down the street is advertising what they call instant refunds with no interest. And I'm tempted because I feel so desperate. My daughter is in pain and I can't even drive her to school. The tax preparer made it sound so easy.

Just sign here and get my money today. But something in my spirit feels uneasy about this. I've been praying for guidance and then I remembered your show.

Please help me understand if these refund loans are as good as they sound. I don't want to make a mistake, but I feel like I'm out of options. Well, Jessica, it is about that time. It's about that time to start filing taxes.

And yes, I'm starting to see those advertisements as well. Let me start by saying I'm sorry about the situation you're going through with your daughter. And I understand your emotions.

It is so tough when, when you're struggling with a sick child. I remember my boys are older now. They're 23 and 27. But I remember those nights staying up late, my wife and I worrying about our kids.

I remember one particular trip. We had done a road trip to Texas to go see my wife's sister. And on the way back, my youngest, he developed this.

He just got sick all of a sudden and he was running a fever that was through the roof. And we're in, I think end of time, we're in the middle of Alabama, pulled over and got a hotel room.

And I'm telling you, it's difficult when you're dealing with a sick child. Then compound your major auto expense. And I'm not making light of it. That is a difficult situation. And I get it. I get it, Jessica.

These are urgent needs. But at the same time, one of the great things about your message is I hear your strong faith and I feel your spiritual unease.

And I'm happy that you're feeling that because in my view, I'm going to cut to the chase. I think these tax refund loans are predatory. They use a ton of shady marketing. And I've seen many listeners who have talked about this.

People talk to me about these all the time. And that's what I try to do on this show.

My goal is to work with people like yourself, Jessica, with working class families and help them navigate financial challenges while continuing to maintain their faith. So today I'm going to provide some practical and spiritual guidance. We're going to talk all about these refund loans.

And remember, if you've got a question, one of the best things you can do is go right to askralph.com we've got a little search button on there and I've got close to 700 episodes. We've got blog posts, we've got videos, all those things there. So before you make a big decision, we.

One of the things I'm going to encourage you to do is go click on the search icon and see if I've already covered that on the show. And listen, here's the best part. If you find that I haven't covered it. All you've got to do is go to justaskralph.com just like Jessica did.

Enter your question in and I will put you on the show. Well, Jessica, you know I always like to start the show with a Bible verse and today I had a tough one.

I was trying to find the perfect one that fit in with your question about tax refund loans. And of course, there's no direct references in the Bible to tax refund loans, but I did find this from the book of Isaiah, chapter 48, verse 17.

And this is what it says.

This is what the Lord says, your redeemer, the Holy One of Israel, I am the Lord, your God, who teaches you what is best for you, who directs you in the way you should go. Now I thought this was an excellent Bible verse because it emphasizes God's role as our teacher and our guide.

And Jessica, I hear you saying that you're using what we call Bible discernment or Christian discernment. And you're being faced with pressuring sales tactics, these quick fix solutions, these tax refill notes that seem like a panacea of fantastic things.

But you've made a decision. You realize that you need to find wisdom to make sound choices. Think about what it says in that verse.

It says teaches you what is best for you and that directly relates to that financial stewardship and wise decision making. And listen, we talk about fundamental principles on this show every day and we're working to manage money God's way.

And also in that verse, it talks about directs you in the way you should go. And Jessica, that's exactly why you asked this question, because it speaks to seeking God's guidance before making any hasty financial decisions.

You know, it's like that bait out there that these tax refund shops put that bait out there, get your money today. And especially this is difficult when you're feeling desperate, when you got that sick child, when you've got that automobile that needs to be fixed.

But I've got answers for you today. So that's what we're going to get to.

You know, one of the things I mentioned a few days ago, and it's something I'm trying to incorporate on every show, is a statement of gratitude. So let me get to that today.

Today I'm grateful for God's wisdom in scripture that protects us from these financial traps and guides us towards true financial freedom. And that's exactly what we're going to talk about on the show today. Jessica. So Jessica, let me tell you about my friend Tom.

Now, Tom's not his real name, but I wanted to illustrate just how predatory these tax refund loans. And a little bit later, I'm going to tell you exactly what they are. And. And Tom learned a valuable lesson. He was just like you.

He's facing a cash crunch, and he was thinking about one of these tax refund loans. So let me tell you about his story. So here's Tom's story. Tom had a daughter. Her name was Rachel. And Rachel got accepted to Liberty University.

Now, this was an answer to prayer. This is something that Tom and his wife and Rachel had really worked towards so hard. They wanted to get her into this school.

In fact, my oldest son is a graduate of Liberty University. And Tom was doing the right thing. His family had been diligently saving. Tom was picking up extra shifts at work and all that sort of thing.

Well, then came the letter, and they needed to get tuition paid. And when they looked at their finances, they had a $3,000 shortfall for the first semester.

And it was a crisis situation because there was only two weeks left till that deadline for that tuition payment. Now, Tom had already kind of worked out his taxes on his own, and he figured it out that he was going to get a $4,200 refund.

And he thought to himself, he said, wow, I need $3,000. I'm gonna get a $4,200 refund, but I need this money in two weeks.

And he did some research online, and he found out that he could get his tax refund in about six weeks from the IRS because he had signed up for direct deposit and all that sort of thing.

So Tom's on his way to work one morning, and he's driving down through town, and he sees this advertisement on the front of one of these billboards as he's driving in. And it said, you know, instant access to your tax refund. It was market pre advance, and it emphasized convenience and speed.

And it didn't talk at all about the actual cost, but it promised what a lot of people are looking for, and that's that immediate money. It emphasized that there was no interest charges. And it was a simple solution.

You know, just go in there, get your tax return done, and there you go, you've got your money. And here's the thing. When we pull up the hood, we realize that the fees were disguised as standard processing charges.

And Tom shared this with me later. He said, ralph, here's what's interesting. He said, they actually inflated the cost of my tax preparation by 200 bucks.

You know, and then he realized when he looked at the fine print, they added administrative charges, they added processing fees. So guess what? His total cost of preparation and this refund loan so he could get his money instantly was 300 bucks.

And that's why I hate these things. I don't offer these things. I'll talk about what I do offer my practice a little bit later. But think about where Tom was faced now.

He's facing this difficult internal conflict. He's got his daughter who worked so hard to get into Liberty University, and he had saved, he had worked extra hours.

So he had this feeling of father's responsibility. He didn't want her to miss out on this opportunity. So he was feeling this tension between this, here's this immediate solution.

But he knew in his heart that it wasn't the best financial decision. And see, here's the best part of this thing. That's what God gives us. He gives us this discernment. So there was spiritual discomfort.

He didn't like the feeling of this quick fix approach, and he prayed about it. He went and looked in the Bible for some lessons on how to wrestle with this thing. So what do we learn from this?

We learned some key financial literacy lessons. And here's the deal, folks, if you don't understand what I'm saying, and I'm gonna talk about exactly what these are in a few minutes.

But here's the thing you need to understand.

When you see that billboard, when you see that advertisement, that radio or TV or online advertisement, getting quick access to your tax refunds comes at a steep price. And think about this. If you wait just a couple of weeks, you can save yourself hundreds of dollars.

When I looked at Tom's situation, his real cost was 15% of his refund for that short term advance. And Tom got into reading a fine print and he understood the true cost of these advanced services.

And yeah, they'll tell you that there's no interest and there's all this, but they just add it to the processing fees. And that's why you've really got to look for other alternative solutions. Now you might be saying, Ralph, what's the spiritual application of this?

This is what the whole show is all about. And I think the biggest takeaway from this is you got to have wisdom in being patient in your financial planning.

You got to use prayer in your financial decisions, and you've got to find peace in your decision making. And for Tom, it was balancing those responsibilities. He wanted his daughter to go to school.

They were short for that first tuition payment, but he also wanted to make a prudent choice. Now, let's get into a little bit more detail about exactly what these tax refund loans are. I'm going to start by saying this.

I've been doing taxes for almost, well, actually over 30 years now, and I do not offer tax refund loans. And what that basically. And we're going to get into it in a second. But I wanted to make this very clear at the beginning.

I do allow clients to pay for their tax return with their refund amount, which does charge a small fee.

But I wanted to be very clear about that because if you go to my website and you say, well, Ralph is a hypocrite, he's talking about how terrible these things are, but here he offers them, that's not true. I do not offer tax refund loans, but I do offer the ability to pay for your tax preparation with your refund. So let's get into the basic definition.

Basically, here's what we're talking about. It's a short term loan based on your expected refund.

So you go and get your tax return done and you go into a tax preparer, some financial institutions, I even see car dealers offering this, which if that's not a big enough red flag for you, I don't know what else you can say. It gives you, you know, early, instant access to your refund money and typically process within a few days of filing your taxes.

So it looks like this. You go in and get your taxes done and they say to you, oh, Mr. Jones, it's great you're doing a $4,000 refund.

How would you like to have that money today or tomorrow? And you're thinking, wow, 4,000 bucks today or tomorrow. I could really use that money. I've got this going on. I like Tom, I got the tuition to pay.

But here's a deal you need to understand. Let me talk about how they work. So like I said, you go in, you get your tax return done, they review your return, they look at your income.

And the way that these things are priced is the loan amount is based on your expected refund. So we said, like, you get a $4,000 refund. These things can be directly deposited to a prepaid card or your bank account.

I've even seen some situations where you can go pick up a check, they set up a temporary account so they can get paid back. And then what they do is the loan amount plus all their fees are automatically deducted when your refund arrives. But you get that money right away.

And then basically the bank or whatever financial institution you're using is basically giving you a short term loan. And they'll say to you, oh no, no, no, Mr. Jones, there's no fees to this, it's interest free. But here's the problem.

Yes, there is no quote, interest charge. But what they do is they pad that tax preparation with higher fees. So they hide those fees and they don't call an interest.

There's a loan origination fee, there's administration fees. I'll give you an example. $800 fee. Think about this. Let's say you're getting a $500 tax refund loan. They're charging you an $89 fee.

Do you realize you're paying 217 interest? That's APR. And listen, I've seen some loans that go up to 36% APR just on the loan amount. You might be saying, rap boy, I'm getting ripped off.

Yeah, of course you are. But you want that money right away.

And I'm going to address a little bit later how to prevent that in the first place because here's a little news flash. Guess what? It's your money to begin with.

You've been withholding this money all year long and, and now they want to charge you to get your own money back. But now, over and above the cost, there are some risks.

So what happens if they process your tax return and then your refund is actually less than you expected? Maybe the IRS found that there was an error made or maybe you have some tax obligations from previous years or something strange happens.

Well, guess what? Now you have a loan and you're responsible for any of those differences.

If you file your tax return during traditional ways and you wait for that refund to be direct deposited, if there's an adjustment, they're going to make the adjustment and give you the adjusted amount. But with these refund loans, they're advancing you that money. And think about that.

I've seen situations where clients will come in after going through one of these predatory loans and then the IRS made an adjustment to their tax return and then they come in because they don't know how to handle this adjustment. And the person they went to to do their taxes had absolutely no clue, which is a whole another issue.

They came in and they said, rob, we just got this notice and it says that, you know, for example, I see this a lot when people claim one dependent and you know, it's like a broken family where there's a, you know, ex wife and ex husband and they play games with who's going to claim the kids. And each of you go and file tax returns and try to claim that child. And then the IRS short does the amount of the refund.

And then the refund place calls you and said, hey, Mr. Jones, guess what? You owe us three grand. And guess what? It's interest to compound in every day. And see, here's the problem.

See, that can worsen existing financial struggles, because I call these predatory. Because they pick on people who can least afford it, and they can encourage dependency on loans.

One of the things I will tell you because I get approached by these loan companies all the time to bring them into my practice is they will give you marketing things, they'll give you email lists because they know a simple truth, that this creates this dependency.

And that's why these tax preparers have an incentive to push these loans, because they get paid for them, they get additional fees for them, and it starts this debt cycle that just continues on and on and on. So I think you get the gist of what I'm saying here. I am not a fan of tax refund loans.

You're basically taking a loan for three, maybe four weeks at the most. Sometimes this is as little as two weeks and they're just wailing you. And see, the thing is, you don't look at it because they say to you, oh, Mr.

Jones, you get a refund of $4,000, but if you do it our way, I can give you $3,800 right now. So he's charging $200. Now, part of that's a tax preparation fee.

But then they charge you fees for the loan and is the percentages when you look at them are insane. So let's talk about some better alternatives. Because clearly, Ralph, there must be better alternatives. And there are.

The big things you can do is wait for your actual refund. I've talked about this a few times. Now file that tax return.

I'm going to encourage you to use a professional tax preparer, use a licensed accountant or a CPA like myself and just wait for that return. Yes, you can sign up for direct deposit. You can file early. You can make sure that your return is accurate.

And one of the things that a lot of people won't say to you, one of the things you can do from the beginning is avoid getting a refund in the first place. And you might be saying, ralph, that doesn't make any sense.

I want to get a refund again, and I stress this sometimes I want to smack clients upside their head when they come in and they're getting a $10,000 refund and they're jumping for joy. And I'm saying to you, but, Joe, do you get it? It's your money.

You've been living all year putting money into your tax, you know, into your tax account, and you get this big refund at the end of the year, but it's your money. And, you know, a lot of people say, well, that's the only way I can save money, Ralph. That's the way you pay for our vacation. And that's cool.

Like, I used to battle people. That used to be a thing. Like, I try to get people within 500 of getting a refund or owing that. Like, as a professional, that's my goal.

So one of the things you can do is set up your withholding so that you don't get a refund in the first place. And if you do, wait for that actual refund.

Now, Jessica, one of the things that I'm going to pick on you about is one of the things I hear you saying is that you don't have that emergency savings. You don't have that emergency set up for when your daughter has an issue or when your car breaks down.

So that's one of the things I'm going to strongly encourage you. I've done several shows about this. This is the reason why you want to have that emergency savings fund. So you don't feel that pressure.

You don't feel that push of that advertising coming at you, you know, right in your face about, hey, you can get this money tomorrow. Another thing you can consider is personal loans, because a lot of times, and you might laugh at this, but I said that was 217 APR.

You can go put stuff on a credit card and maybe pay 18, 19, even 20%, certainly not 200%. Now, the thing you could do is explore credit union payday alternative loans. A lot of credit unions offer these.

When I was back in my credit union days, I used to do this where we would give you a payday loan and it's a really low interest rate. And then last but not least, you can seek some community organization assistance.

Now, one of the things I mentioned on the last few shows is that every day when I record this show, I also write a blog post. So if you want a little bit deeper information, I cite sources I can give you resource to look at. You can go read our daily blog post.

You can get to that by going to askralphpodcast.com/blog and listen every episode. I do has a blog post. So let me say this.

While we're talking about taxes, let me talk to you for a minute about something I see every day in my accounting practice. You know that feeling when you're. When you're staring at those tax forms and your stomach's in knots?

I had a client say to me, last tax season, ralph, when I come to you, it's like going to the dentist. Maybe you're worried about missing deductions, or perhaps you've heard about new tax laws but aren't sure how they affect you. And I get it.

See, this is what I do every day. This is not what you do every day. And that's exactly why I founded Saggio Management Group is my accounting practice.

So both as an accountant and a business owner, I can tell you firsthand that tax season doesn't have to be a nightmare. It doesn't have to feel like you're in a night terror or you're going to the dentist. Because here's what keeps me up at night.

Last year, I saw countless hardworking people and business owners who had overpaid their taxes by thousands of dollars. And why did they do that? Simply because they didn't know about available deductions and credits. They're not tax professionals.

They're literally leaving money on the table. In some cases paying the IRS money they didn't need to pay them.

So listen, whether you're running a small business or filing individual tax returns, tax laws are changing constantly. I did a show a few weeks ago about all the changes we're going to see in 2025.

So just this year alone, we've seen major shifts that could impact your bottom line. And at side you manager group, we don't just file your taxes. That's the easy part. The hard part is building a strategic plan to Legally.

I mean, legally. I'm not going to put you in a position where you're going to end up with handcuffs on.

I want to help you build a strategic plan to legally minimize what you owe. And here's what makes me different. I'm not just a tax preparer. I'm your financial ally.

If you listen to this show, you know that's what I'm all about. I handle everything from individual and business tax returns to estate planning, succession strategies. And here's the best part.

I don't disappear after tax season. I'm here year round to help you make smarter financial decisions.

I'm not going to be one of those places in the strip mall that Once tax season's over, they're gone.

So whether you're in California, Texas, New York, or anywhere in between, I can offer you virtual tax preparation services that give you the same personalized attention to that my clients get when they come out here to the farm. And I work with them individually. And we do that through secure video conferencing, screen sharing, and our encrypted client portal.

We handle everything seamlessly, just as if you're sitting in our office. In fact, I'm going to use my prompter just like I'm using right now. If you're watching this show, we'll do it face to face. So do yourself a favor.

Don't wait until you're stressed about deadlines or worried about an audit. Let me help you not pay more than your fair share in taxes. And remember, I'm not just reading this ad. I own this firm.

And I personally stand behind every service I offer. Because here's the truth. Your financial peace of mind is my business, it's my passion, and it's what's in my mission fields.

Schedule today by going to askralphpodcast.com/taxprep that's askralphpodcast.com/tax prep. And you know what? Some of my clients have saved enough on their taxes to pay for our services multiple times over. That's not a promise.

That's just what smart tax planning can do. Again, that's askRalphpodcast.com/taxprep so let's get to today's reflection questions.

You know, I covered a lot of stuff here, and I always like to ask a few reflection questions. So let's start with number one. How would waiting a few extra weeks for your refund impact your financial situation?

Think about that and be honest with yourself. Can you find other ways to bridge that without paying those ridiculous fees? So just ask yourself that question.

How could waiting a few more weeks impact your financial situation? Number two, what steps can you take today to build an emergency fund and avoid needing quick cash?

Jessica, that's going to be my encouragement for you. I know you're in a crisis right now, but what can you do starting today to build that emergency fund so you don't have that crisis situation?

So that's the second question. You know, what can you do to build that emergency fund?

And number three, and this one's the one that cuts a little deep and has it Are you being a good steward of your finances according to biblical principles? And listen, I turn that on myself, too.

This is something that we each need to reflect on every single day, in every decision we make, we need to ask ourselves, are we being good stewards of what God has given us based on those biblical principles? So I promised you some action steps. So here are five concrete action steps.

Number one, if you don't listen to anything else I say today, file early and plan ahead. Here's the thing. Submit your tax returns as soon as you have all the documents. That way you can get your loan or you get your refund.

Now, we don't want to do loans. Remember, don't do those. Get your refund as quick as you can. Mark your calendar, because typically you'll get your refund in about 21 days.

And then what you can do is just create yourself a simple budget to manage expenses until you get that refund. If you're really in that crisis mode, do that. Another thing you want to do, Number two, compare your tax preparation options.

There are free filing options. Through IRS.gov, you can get quotes from multiple tax preparers. But look for people who are certified preparers.

Look for people who are professionals, who are licensed and give you transparent pricing. And listen, avoid preparers pushing loan products. You're not there for a loan. You're there for professional tax preparation, not a loan.

If you need a loan, go to the bank and get a loan. Don't go to a tax return preparer. Number three thing. Look at the total cost. Calculate those true costs. Request a full disclosure in writing.

Hey, listen, I talked about a little while ago. I offer clients the ability to pay me with their refund. It's not a refund loan. They still wait the same amount of time to get their refund.

But the money gets goes to me before they have to worry about paying me. And I give them a disclosure because they're charged a fee for that. It's not a big fee. I don't actually get that fee. It's charged by the bank.

But it's a convenience. And add up all those charges. Look at the preparation costs, because a lot of times that's hidden. Look at the processing fees and those loan fees.

And here's the dirty little secret. When you do this, you'll be amazed. Convert those total fees to a percentage of your refund.

So if you're getting a thousand dollar refund and your fees are 200, guess what? You're paying 20%. So ask yourself, is it worth paying 20% of my refund to get that money? 21 days, if I wait, or tomorrow, is it worth it? 20%?

200 bucks to wait three weeks. Number four thing explore those emergency fund options. Start building that emergency fund even if it's 10, 20, 30 bucks a week. Start to build that.

If you are in a crisis, look for some low cost alternatives like credit union loans, personal loans. Maybe you can go to your employer and get an employer advance or some payroll flexibility. Reach out to creditors about payment plans.

But listen, do not do these tax refund loans. They are a huge ripoff.

Number five Thing I want to encourage you to do whenever you're filing your tax return, Use direct deposit because it will get your refund faster. It's more secure. Make sure you verify your bank information carefully when you're working with a preparer.

If you're doing it your own, make sure of that. Listen, once you file your tax return, go to the IRS website and track your refund and then keep documentation of all those tax filings.

Those are the things that can really set you up for success. Now tomorrow I'm going to tackle another important topic and that's how to pay down Christmas credit card debt.

Maybe you're one of those people and I want to tell you about one of my clients who found themselves up to their eyeballs in credit card debt because you just put way too much on that credit card during the holidays. So I'm going to give you some practical strategies for helping you get back on track tomorrow. Grow.

And remember, as I close, my passion is to help you achieve financial success. I want to see you live out your dreams. I don't want to see you getting taken advantage of by these tax refund loans.

And I want to see you grow in your faith and I know together. And if you want to work with me, you can go right there.

As I talked about, that's askralphpodcast.com/taxprep but working together, we can truly master your finances from a Christian perspective. So as I always end this show, stay financially savvy out there and may God bless you abundantly.

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