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How Tax Refund Advance Loans Really Work

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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MagnifyMoney did some digging around to give you the lowdown on refund advances. Here’s what you need to know.

The checkered past of refund anticipation loans

These so-called “refund anticipation loans,” as they were once called, aren’t exactly new. They’ve been around since the late ’80s, when e-filing was just picking up momentum.

According the U.S. Census Bureau, these loans typically came with triple-digit APRs and hefty fees. What’s worse, 2009 data put out by the IRS suggested that these loans were marketed mainly toward low-income taxpayers. And more often than not, they were presented in ways that were misleading and falsely advertised, according to the National Consumer Law Center (NCLC).

Not surprisingly, refund anticipation loans grew to be a source of consternation among consumer advocates. To carry them out, tax-prep companies would take their cut, then deposit the remainder of the refund into a temporary bank account that the taxpayer typically accessed via a prepaid bank card.

Fortunately, these loans became a thing of the past in 2012 amidst major outcry from consumer advocacy groups like the NCLC and others. Ira Rheingold, executive director of the National Association of Consumer Advocates, tells MagnifyMoney that they were as predatory as payday loans.

“Thanks to consumer complaints and government action, things have gotten somewhat better, but these refund anticipation loans were known for sky-high interest rates and exorbitant fees,” he says.

How today’s tax refund advances work

Liberty Tax offers a free tax refund advance loan option.

These days, refund anticipation loans have been rebranded as tax refund advances. But the change runs deeper than just the name. According to top tax-prep servicers like H&R Block, Jackson Hewitt and Liberty Tax, these revamped products are 100 percent free for those who qualify. Advance amounts range depending on eligibility, but Liberty Tax is offering as much as $3,250.

Tax-prep servicers are exceptionally tight-lipped when it comes to the qualifying criteria. (See our handy chart below.) H&R Block is the most forthcoming, but there are still a lot of question marks.

Elgibility requirements include providing proper identification and having a “sufficient” tax refund, whatever that means.

However, there are a few things that could get you declined, including having bad credit, failing to present relevant tax forms like W-2s and 1099s, or not meeting certain income requirements, among other things. If you are approved, the loan amount is deposited into a temporary bank account you can access with a prepaid debit card, unless the servicer offers a direct deposit option. Either way, the loan itself is indeed fee-free and has a 0 percent APR.

Be that as it may, experts still encourage consumers to approach with caution.

“From the perspective of the consumer, I’d say they need to be very skeptical,” Adam Rust, director of research at consumer advocacy group Reinvestment Partners and managing director of the nonprofit WiseWage, told MagnifyMoney. “Private companies don’t provide free services and banks don’t make free loans.”

H&R Block is one of several tax preparer services that offers a tax refund advance loan to customers from $500 to $3,000.

Tax advances are indeed more accurately described as loans. The cash actually comes from banks, which are reimbursed when your refund comes in. In order to offer these advances, Rust says tax-prep companies cover the bank fees, essentially making them free for the consumer.

“It’s actually a cost item for the preparers, which is one more reason to suspect that these loans aren’t really free,” he said. “The price may say free, but that doesn’t mean it can’t be recovered within the cost of the tax prep.”

This is where things get a little less transparent. H&R Block declined a phone interview with MagnifyMoney, so I called up my local storefront and asked if there’s an additional charge for getting a tax refund advance. In other words, will my tax preparation fee be the same whether I get a refund advance or not? I was told it would be, but locking down an accurate estimate for the service isn’t easy.

According to the National Society of Accountants, the average tax-prep fee for federal and state returns during the 2017 filing season was $273 for folks who itemized their deductions; $176 for those who didn’t. The takeaway here is that the complexity of the return appears to increase consumer costs. To get an actual estimate, you’ll need to present your tax information, but the price you’re quoted is likely to vary.

In 2016, consumer advocacy group Georgia Watch sent mystery shoppers into paid tax-prep firms in low-income neighborhoods in southwest Atlanta. What they found was “a stunning lack of knowledge and professionalism from preparers, vast inconsistencies in preparation fees, and a wide range of outcomes given the same inputs at each site.”

Rheingold, who was not involved in the research, isn’t all that surprised by the findings.

“The quality of tax preparers in high-volume firms is often pretty poor,” he said.

Hidden costs to look out for

Refund transfers

If you’re declined for a tax refund advance loan, some tax preparation companies may offer you a concession prize: the chance to get a refund transfer.

A tax refund advance may be advertised as free, but the same can’t be said for a refund transfer.

Instead of paying your tax-prep fees at the time of service, you can defer it with a transfer. The tax preparer essentially creates a short-term account where your refund is deposited, at which point they’ll take their fee directly. H&R Block charges $39.95 for a federal refund transfer. It’s called an assisted refund at Jackson Hewitt, where it’ll run you $49.95. Meanwhile, Liberty Tax says you have to “consult your tax office” for pricing details.

It’s marketed for its speed and convenience, but Rust says taxpayers should think twice before opting in. Almost half of Liberty Tax’s filers last year ended up getting a refund transfer, according to the company’s 2017 annual report.

“That’s really telling to me because the refund advance is marked as free, but the refund transfer isn’t,” Rust said. “So why are so many people paying for the transfer?”

What Rust is getting at is that it appears as though the lure of a free refund advance gets people in the door, at which point they’re sold on the refund transfer after getting declined. Since offering these loans is a cost product for tax-prep companies, Rust says it’s a fair assumption.

The cost of accessing your funds

Prepaid debit cards essentially serve as substitute checking accounts for those who don’t have one. Many tax preparation companies offer prepaid debit card products that customers can sign up for in order to have their tax refunds deposited there. However, these cards my carry additional fees that can eat away at the value of the tax refund itself.

“One of the things we’ve seen is the growth of prepaid debit cards to access your refund advance,” said Rheingold. “Accessing your money through an ATM [often] comes with fees, which means you’re being charged to access your own money.”

Jackson Hewitt puts refund advance funds on the American Express Serve Card if you’re not doing a direct deposit into your checking account. H&R Block goes with the Emerald Prepaid Mastercard, and Liberty Tax uses a Netspend prepaid Mastercard.

Where to get a tax refund advance

Here’s what the major tax-prep companies are offering. Again, all advances are marketed as free, and you have to apply at a participating office by Feb. 28. Jackson Hewitt is in the game as well, but their website pushes people to visit a local office to learn more.

 

H&R Block

Liberty Tax

Loan amounts

$500, $750, $1,250 or $3,000

$500, $800, $1,300, $3,250

Eligibility

According to their website: "You first must meet certain eligibility requirements such as having a sufficient tax refund from the IRS, and provide appropriate identification. You then submit an application to BofI Federal Bank, the lender. The bank will evaluate your application based on standard underwriting criteria and makes the decision to approve or deny your application."

Must visit a Liberty Tax office for eligibility requirements

When is the advance available?

Typically the same day

Usually within 24 hours

Alternatives to a tax refund advance

You can always file earlier to expedite the arrival of your refund. Without a tax refund advance, most folks who file electronically can expect their refund in less than three weeks, according to the IRS. The most common cause for delay is if you’re claiming the Earned Income Tax Credit or the Additional Child Tax Credit, which will push your refund at least into late February.

Either way, for simple returns where the filer is only bringing in a W-2 and not itemizing, Rust says most preparers can probably complete the job in less than 90 minutes.

“Should that cost more than $200? Should the chance of receiving an advance justify spending that much when, instead, a low-income filer could go to a VITA site and have their return prepared for free?” he asked.

Rust is referring to the IRS Volunteer Income Tax Assistance program, which offers free tax preparation for people who earn $54,000 or less per year. Those who are above the income threshold can also opt for out-of-the-box software like TurboTax. Prices vary here depending on the complexity of your return, but it’s generally much cheaper than going with a storefront tax preparer.

Final thoughts on tax refund advances

If getting a tax refund advance means adding to your tax-prep bill, Rheingold says it doesn’t make financial sense to get one.

“Even if it says it’s free, it’s a safe bet that these places are baking the costs into the tax-prep fee to make up the difference.”

That said, if you’re in dire financial straits, it may be your only resource for quick cash — but buyer beware.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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2019 Fed Meeting Predictions — No More Rate Hikes Until 2020

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The March Fed meeting put the kibosh on more rate hikes in 2019. With FOMC policy on pause, market interest rates should hold steady (or even decline in some cases) for financial products you use every day. Read on for our predictions for each upcoming Fed meeting and updates on what went down at the most recent conclaves.

What happened at the March Fed meeting

The Federal Reserve signaled no rate hikes this year, and the possibility of only one increase in 2020. The Fed has pivoted pretty rapidly from its hawkish stance in 2018 to a more dovish outlook as it puts policy on ice. This change in tone grows directly from the FOMC’s observation of slowing growth in economic activity, namely household spending and business investment. The Fed also noted that employment gains have plateaued along with the unemployment rate, which nevertheless remains at very low levels.

So the federal funds rate looks to remain at 2.25% to 2.50% for a year or more, and the FOMC highlighted that this is the not-too-hot, not-too-cold level that for now best serves its dual mandate to “foster maximum employment and price stability.”

The Fed also released its Summary of Economic Projections (SEP). The March SEP indicated a median projected federal funds rate of 2.6% for 2020, which is why everybody is discussing the possibility of at least one, small increase next year.

For those who were really hoping for at least one more rate hike, all is not lost — Tendayi Kapfidze, LendingTree chief economist, believes we shouldn’t take March’s decision too gravely. “There are special factors that suggest the economy could reaccelerate,” he says. “The government shutdown threw a wrench into things, slowing some activity and distorting how we measure the economy.” He also remarks that since the financial crisis, data in the first quarter has continued to come in weak, still leaving room for everything to reaccelerate in the second and third quarters. He points to the already strong labor market as a plus.

Fed economic forecasts hint at a possible rate cut by the end of 2019. Just as the Fed projects a slightly higher federal funds rate in 2020, it also posted a projected 2.4% for 2019. Note that this projected rate falls below the upper end of the current rate corridor of 2.5%. This means the doves may want to see a possible rate cut if improvements in the economic outlook don’t materialize by mid-year.

When asked about this potential rate cut, Fed Chair Jerome Powell emphasized the Committee’s current positive outlook, while also emphasizing that it remains mindful of potential risks. Still, he maintained that “the data are not currently sending a signal that we need to move in one direction or another.” He also remarked that since it’s still early in the year, they have limited and mixed data to consult.

Kapfidze offers a more concretely positive outlook, noting that the chances of a rate cut are pretty slim. “To get a rate cut, you’d have to have sustained growth below 2%. There would have to be further weakness in the economy, like if trade deals get messier, to warrant a rate cut.”

The Fed downgraded its economic outlook for 2019 for the second time in recent months. In line with Kapfidze’s predictions, we did see a weaker economic outlook coming out of this month’s Fed meeting. The median GDP forecast for 2019 and 2020 decreased from December projections, while it remained the same for 2021 and beyond. This comes hand in hand with the decreased fed funds rate projections.

The FOMC increased their unemployment projections, which Kapfidze found surprising because the labor market has been so strong. “Maybe they believe that those numbers indicate a deceleration,” he said, “but really, it has to be consistent considering the other changes that they made.”

Why the Fed March meeting is important for you

It’s easy to let all of this monetary policy talk go in one ear and out the other. But what the Fed does or doesn’t change has an impact on your daily life. Without a rate hike since December, we’re already starting to see mortgage rates fall. This is helpful not only for those who want to buy a home, but also for those who bought homes at last year’s highs to refinance.

As for personal loans and credit cards, we may still see these rates continue to increase, just at a slower rate. These rates have little chance of decreasing because lenders may take the current weaker economic data as a sign that the economy is going to be more risky.

Deposit accounts will feel the opposite effects as banks may start to cut savings account rates. At best, banks will keep their rates where they are for now, until more evidence for a rate cut arises.

Our March Fed meeting predictions

There’s little chance of a rate hike this time around. In a policy speech on March 8, Fed Chair Jerome Powell reinforced the FOMC’s patient approach when considering any changes to the current policy, indicating he saw “nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures.”

This is no different from what we heard back in January, when the Fed took a breather after its December rate hike. There was no change to the federal funds rate at that meeting, and Powell had stressed that the FOMC would be exercising patience throughout 2019, waiting for signs of risk from economic data before making any further policy changes.

Further strengthening the case for rates on hold, the reliably hawkish Boston Fed President Eric Rosengren cited several reasons that “justify a pause in the recent monetary tightening cycle,” in a policy speech on March 5. His big tell was citing the lack of immediate signs of strengthening inflation, which remains around the Fed’s target rate of 2%.

Even though there had been some speculation of a first quarter hike at the March Fed meeting, LendingTree chief economist Tendayi Kapfidze reminds us that the Fed remains, as ever, data-dependent. “The latest data has been on the weaker side, with the exception of wage inflation,” he says.

The economic forecast may be weaker than December’s. The Fed will release their longer-range economic predictions after the March meeting. These projections should include adjustments in the outlook for GDP, unemployment and inflation. The Fed will also provide its forecast for future federal funds rates.

Kapfidze expects we’ll see a weaker forecast this time around than what we saw in December. “I except the GDP forecast to go down, and the federal funds rate expectations to go down.” This follows a December report that posted lower numbers than the September projections.

Despite flagging economic projections, Rosengren offered a steady outlook in his speech. “My view is that the most likely outcome for 2019 is relatively healthy U.S. economic growth,” he said, again attributing this to “inflation very close to Fed policymakers’ 2 percent target and a U.S. labor market that continues to tighten somewhat.”

The Fed’s economic predictions offer clues to its future policy decisions. In September, the Fed projected a 2019 federal funds rate of 3.1%. That number dropped to 2.9% in the December report. With the current rate at 2.25% to 2.5%, there’s still room for more hikes this year. Keep in mind, however, that, the March meeting may narrow projections for the rest of 2019.

As for Kapfidze, he thinks we’ll see a rate hike in the second half of the year. “If wage inflation continues to increase and it trickles more into the economy, the Fed could choose to raise rates due to that risk.”

However, as of March 12, markets see the odds of a rate hike this year at zero, while the odds of a federal funds cut has risen to around 20%, based the Fed Fund futures.

Upcoming Fed meeting dates:

Here is the FOMC’s calendar of scheduled meetings for 2019. Each entry is tentative until confirmed at the meeting proceeding it. For past meetings, click on the dates below to catch up on our pre-game forecast and after-action report.

Our January Fed meeting predictions

Don’t expect a rate hike. The FOMC ended the year with yet another rate hike, raising the federal funds rate from 2.25 to 2.5%. It was the committee’s fourth increase of 2018, which began with a rate of just 1.5%.

But the January Fed meeting will likely be an increase-free one. Tendayi Kapfidze, chief economist at LendingTree, the parent company of MagnifyMoney, said the probability of a rate hike is “basically zero.”

Kapfidze’s assessment is twofold. First, he noted that the Fed typically announces rate increases during the third month of each quarter, not the first. This means a hike announcement would be much more likely during the FOMC’s March 19-20 meeting, rather than in January.

Perhaps more importantly, Kapfidze said there’s been too much market flux for the FOMC to make a new decision on the federal funds rate. He predicts the Fed will likely wait for more evidence before it considers another rate hike.

“I think a lot of it is a reaction to market volatility, and therefore that’s lowered the expectations for federal fund hikes,” Kapfidze said.

But if a rate hike is so unlikely, what should consumers expect from the January Fed meeting? Here are three things to keep an eye on.

#1 The frequency of rate hikes moving forward

It’s unclear when the next increase will occur, but the FOMC’s post-meeting statement could give a clearer picture of how often rate hikes might occur in the future.

The Fed released its latest economic projections last month, which predicted the federal funds rate would likely reach 2.9% by the end of 2019. This figure was a decline from its September 2018 projections, which placed that figure at 3.1%.

As a result, many analysts — Kapfidze included — are forecasting a slower year for rate hikes than in 2018. Kapfdize said some analysts are predicting zero increases, or even a rate decrease, but he believes that may be too conservative.

“I still think the underlying economic data supports at least two rate hikes, maybe even three,” Kapfidze said.

Kapfidze’s outlook falls more in line with the Fed’s current projections, as it would mean two rate hikes of 0.25% at some point this year. There could be more clarity after the January meeting, as the FOMC’s accompanying statement will help indicate whether the Fed’s monetary policy has changed since December.

#2 An economic forecast for 2019

The FOMC’s post-meeting statement always includes a brief assessment of the economy, and this month’s comments will provide a helpful first look at the outlook for 2019.

Consumers will have to wait until March for the Fed’s full projections — those are only updated after every other meeting — but the FOMC will follow its January gathering with its usual press release. This statement normally provides insight into the state of household spending, inflation, the unemployment rate and GDP growth, as well as a prediction of how quickly the economy will grow in the coming months.

At last month’s Fed meeting, the committee found that household spending was continuing to increase, unemployment was remaining low and overall inflation remained near 2%. Kapfidze expects January’s forecast to be fairly similar, as recent market fluctuations might make it difficult for the FOMC to predict any major changes.

Read more: What the Fed Rate Hike Means for Your Investments

“I wouldn’t expect any significant change in the tone compared to December,” Kapfidze said. “I think they’ll want to see a little more data come in, and a little more time pass.”

At the very least, the statement will let consumers know if the Fed is taking a patient approach to its analysis, a decision that may help indicate just how volatile the FOMC considers the economy to be.

#3 A response to the government shutdown

The big mystery entering January’s Fed meeting is the partial government shutdown. While Kapfidze said the FOMC’s outlook should be similar to December, he also warned that things could change quickly if Congress and President Trump can’t agree on a spending bill soon.

“The longer it goes on, and the more contentious it gets, the less confidence consumers have — the less confidence business have. And a lot of that could translate to increased financial market volatility,” Kapfidze said.

Kapfidze added that the longer the government stays closed, the more likely the FOMC is to react with a change in monetary policy. During the October 2013 shutdown, for example, the Fed’s Board of Governors released a statement encouraging banks and credit unions to allow consumers a chance at renegotiating debt payments, such as mortgages, student loans and credit cards.

“The agencies encourage financial institutions to consider prudent workout arrangements that increase the potential for creditworthy borrowers to meet their obligations,” the 2013 statement said.

What happened at the January Fed meeting:

No rate hike for now

In its first meeting of 2019, the Federal Open Market Committee announced it was keeping the federal fund rate at 2.25% to 2.5%, therefore not raising the rates, as widely predicted. This decision follows much speculation surrounding the economy after the Fed rate hike in December 2018, which was the fourth rate hike last year. In its press release, the FOMC cited the near-ideal inflation rate of 2%, strong job growth and low unemployment as reasons for leaving the rate unchanged.

In the post-meeting press conference, Federal Reserve Chairman Jerome Powell confirmed that the committee feels that its current policy is appropriate and will adopt a “wait-and-see approach” in regards to future policy changes.

Read more: How Fed Rate Hikes Change Borrowing and Savings Rates

Impact of government shutdown is yet to be seen

The FOMC’s official statement did not address the government shutdown in detail, although it was discussed briefly in the press conference that followed. Powell said he believes that any GDP lost due to the shutdown will be regained in the second quarter, providing there isn’t another shutdown. Any permanent effect would come from another shutdown, but he did not answer how a shutdown might change future policy.

What the January meeting bodes for the rest of the year

Don’t expect more rate hikes. As for what this decision might signal for the future, Powell maintains that the committee is “data dependent”. This data includes labor market conditions, inflation pressures and expectations and price stability. He stressed that they will remain patient while continuing to look at financial developments both abroad and at home. These factors will help determine when a rate adjustment would be appropriate, if at all. When asked whether a rate change would mean an increase or a decrease, he emphasized again the use of this data for clarification on any changes. Still, the Fed did predict in December that the federal funds rate could reach 2.9% by the end of this year, indicating a positive change rather than a negative one.

CD’s might start looking better. For conservative savers wondering whether or not it’s worth it to tie up funds in CDs and risk missing out on future rate hikes – long-term CDs are looking like a safer and safer bet, according to Ken Tumin, founder of DepositAccounts.com, another LendingTree-owned site. Post-Fed meeting, Tumin wrote in his outlook, “I can’t say for sure, but it’s beginning to look more likely that we have already passed the rate peak of this cycle. It may be time to start moving money into long-term CDs.”

Look out for March. Depending on who you ask, the FOMC’s inaction was to be expected. As Tendayi Kapfidze, LendingTree’s chief economist, noted [below], if there is going to be a rate increase this quarter, it will be announced in the FOMC’s March meeting. We will also have to wait for the March meeting to get the Fed’s full economic projections. For now, its statement confirms that household spending is still on an incline, inflation remains under control and unemployment is low. It also notes that growth of business fixed investment has slowed down from last year. As for inflation, market-based measures have decreased in recent months, but survey-based measures of longer-term inflation expectations haven’t changed much.

 

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Learn more: What is the Federal Open Market Committee?

The FOMC is one of two monetary policy-controlling bodies within the Federal Reserve. While the Fed’s Board of Governors oversees the discount rate and reserve requirements, the FOMC is responsible for open market operations, which are defined as the purchase and sale of securities by a central bank.

Most importantly, the committee controls the federal funds rate, which is the interest rate at which banks and credit unions can lend reserve balances to other banks and credit unions.

The committee has eight scheduled meetings each year, during which its members assess the current economic environment and make decisions about national monetary policy — including whether it will institute new rate hikes.

A look back at 2018

Before the FOMC gathers this January, it’s worth understanding what the Fed did in 2018, and how those decisions might affect future policy.

The year 2018 was the Fed’s most aggressive rate-raising year in a decade. The FOMC’s four rate hikes were the most since the 2008 Financial Crisis, after the funds rate stayed at nearly zero for seven years. This approach was largely based on the the FOMC’s economic projections, which found that from 2017 to 2018 GDP grew, unemployment declined and inflation its Fed-preferred rate of 2%.

In addition to the rate hikes, the FOMC also continued to implement its balance sheet normalization program, through which the Fed is aiming to reduce its securities holdings.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dillon Thompson
Dillon Thompson |

Dillon Thompson is a writer at MagnifyMoney. You can email Dillon here

Lauren Perez
Lauren Perez |

Lauren Perez is a writer at MagnifyMoney. You can email Lauren here

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