Trick of 'magic' tax refund loans? High rates

A broad smile spreads over Magic Johnson's face. "Sooner or later, we all need help," the former NBA superstar says into the camera. "If you need cash quickly, Jackson Hewitt has the Money Now loan. It's fast, it's simple - it's money like magic." But consumer advocates say the quickie tax-refund loans Johnson is advertising prey on the working poor. These refund anticipation loans - short-term cash advances against expected tax refunds - carry hefty price tags. On an annualized basis, the interest rates range from 40 to nearly 500 percent. "These loans gouge (taxpayers) with all kinds of fees and ridiculous add-ons," said Kimberly Jones, policy advocate at the California Reinvestment Coalition. "When (low- or moderate-income) people have the right information, they can get their taxes prepared for free and receive all of the tax refund due to them." But the lure of quick cash tempts plenty of people. About 1 out of every 15 taxpayers, or 8.7 million people, opted for the tax-refund loans in 2007, costing them $833 million in loan charges and another $68 million in related fees, according to Chi Chi Wu, a staff attorney with the National Consumer Law Center in Boston, who analyzed IRS data. Almost two-thirds of the tax-refund borrowers receive the earned income tax credit, a special program for low-income working families. "This is the government's biggest anti-poverty program," Wu said. "The companies pitching tax-refund loans know there is a population of low-income folks who expect a big refund (because of the earned income tax credit). This product is really targeted to them." Refund anticipation loans are marketed by tax-preparation services, but are actually made by banks. The banks and the tax services split the fees. Jackson Hewitt, which has about 6,800 franchised and company-owned offices nationwide, declined an interview request. In a statement, the New Jersey company said: "For those that have limited or no access to traditional banking relationships and may have a need for quick access to funds to meet a timely expense, a (refund anticipation loan) may be a viable financial option, as well as a more cost-effective option when compared to seeking a cash advance on a credit card or other short-term loan option." SOURCE:SFGATE.COM