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Early Refund Loans are a Bad Deal

Category Taxes

Thinking about getting an early refund loan when you have your taxes done? Those early refund loans are a bad idea from a frugal point of view - the effective interest rate on them is sky high.


Example: Let's say you are owed $500 as a refund and get an early refund loan for $475 ($500 - $25 fee charged by lender). Let's say you would have gotten your refund in 6 weeks anyway so you paid $25 to have the use of $475 for 6 weeks. That means your effective interest rate is $25/$475 = 5.26%. So you are paying 5.26% in interest every 6 weeks in effect. If you annualize that rate to see what the annual percentage rate is. First divide 52 into the amount of time in the loan (6/52 = .1154), then divide the interest charged ($25) by the quotient (.1154) to find what the annual interest charges would be on this loan ($25/.1154 = $216.64), finally divide the annual interest charges by the amount of the loan you actually got ($216.64 / $475 = 45.61%). This means your effective annual interest rate on the loan is 45.61% which makes these loans a very bad idea for the borrower.


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