A Grinch: Tax Loans Before Tax Season

Thursday, Dec. 21, 2006 | Earlier this week I learned of a disturbing new trend while watching “NBC Nightly News”: holiday loans. It seems some tax preparers are turning into predatory lenders, luring vulnerable consumers at the worst time of year to be a have not.

Of course, the irony of all those diamond and Lexus ads airing on the very same network wasn’t lost on me. Thankfully, you can’t borrow enough from holiday lenders to finance jewels.

This is essentially a tax season loan – something you used to apply for when you filed your taxes (and you shouldn’t do that either) – only it’s been bumped up in time for holiday shopping. Jackson Hewitt started offering holiday loans to consumers last year while competitor H&R Block launched its product this year.

Here’s how they work: you bring your most recent pay stub to an H&R Block office where they use it to calculate your final paycheck and an estimate of your 2006 tax return. If they estimate a refund more than $1,000, you get to borrow up to $1,500. That’s after a credit check by the company’s partner HSBC Bank. The best interest rate you can hope for is 36 percent and the money is due on Feb. 19, but if you don’t have the money in time – say Uncle Sam doesn’t issue your refund soon enough or you spend money you don’t have and don’t have any left to pay your creditor – you’ll keep paying 36 percent interest. The money is disbursed in one of two ways: a check, which comes with a $24.95 fee, or they give you a cash card, which has no fees.

Jackson Hewitt’s Holiday Express Loan Program, or HELP, works similarly except you can only borrow up to $400 and the loan program ended Dec. 19. The Jackson Hewitt’s website link to loan details features an adorable little girl with a present and a giant smile. Translation: HELP us HELP you make your kid happy.

NBC News reporter Kevin Corke reported this week that H&R Block’s own chief executive, Mark Ernst, called its competitor’s holiday loans a poor value for consumers in a conference call with investment analysts on Feb. 24. “This looks like another variation on refund loans, only worse,” Ernst said. Apparently, his view has changed or H&R Block just doesn’t like being left out of an easy way to make money.

Consumer advocates advise would-be shoppers to avoid these loans completely and have lobbied against tax season loans as a whole because interest rates can be higher than 300 percent. A $100 loan can cost $400 in interest if it takes a whole year to repay the money.

Any way you parse it, these loans look like a bad idea because they are. If you don’t have a lot of extra cash on hand, you’re much better off using your regular credit card as long as you know you can pay the bill in full when it arrives next month. Otherwise, you can’t afford it.

If you don’t have enough money to buy everything your family wants for Christmas, don’t buy everything. Practice this with me: I will not spend more than I can afford on Christmas presents even if that means I buy nothing for dear Aunt Bernice or even dear old mom. Send them a card or some homemade cookies. If your family wants presents more than they want you to have a balanced checkbook, you need a new family.

Catherine MacRae Hockmuth is a free-lance writer living in Point Loma. Please contact her directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.