Are Christmas Loans and RALs Your Only Options for Holiday Shopping?

Are Christmas Loans and RALs Your Only Options for Holiday Shopping?

While some indicators point towards an economy on the mend (including steady inflation rates and strong Black Friday sales), it’s clear that many Americans are still financially strapped. This has been particularly evident over the past few weeks as my email inbox has been chock full of questions about whether H&R Block will be offering their traditional Christmas loans in 2011.

If you’re considering applying for a “Christmas loan”, RAL or other loan secured by a tax refund, I would urge you to think about these strategies:

Increasing pressure from the feds has limited the ability of many companies to offer advance loans, including those refund anticipation loans (RALs) from H&R Block. RALs (and similar lending products) are essentially loans secured by the promise of a tax refund. In the case of the Christmas loans, H&R Block offered loans in November and December which would be paid by the borrower in installments as agreed or by having the borrower sign over a portion of his or her tax refund. The loans were generally used to buy Christmas gifts and were paid back in early January or February (when forms W-2 and 1099 were issued). After the loan was paid from the taxpayer’s refund amount together with interest, fees for tax preparation products and tax preparation services were generally subtracted and the balance, if any, was issued to the consumer in some form (check, debit card, direct deposit, etc.). If the taxpayer owed more than his or her refund, he or she would pay the difference.

Beginning this year, the IRS no longer provided tax preparers, banks and lenders with the “debt indicator” that these lenders use to determine eligibility for RALs. The debt indicator is an electronic acknowledgment to tax preparers advising whether any part of a taxpayer’s refund has been earmarked for offset due to outstanding tax debts or priority obligations such as unpaid child support or delinquent student loans. In previous years, the IRS provided this information, free of charge, to third party preparers, who then made the decision to offer a variety of loan products depending on the answer.

A typical Christmas loan in years past, based on anecdotal evidence provided by my reader, seemed to be about $900

With increased defaults on these loans, pressure to reduce interest and fees for the loans and a lack of a free debt indicator, many of the traditional loan products have been scaled back. H&R Block no longer advertises a “Christmas loan” (at least not in my area of the country) but rather touts its Emerald suite of products. This includes the Emerald Advance Line of Credit which is a year-round line of credit of up to $1,000 which can be repaid with a portion of your tax refund. The loans appeal to holiday shoppers with the promise of quick cash at the end of the year. However, Block is clearly tying the loans to tax refunds by stating the line of credit must be paid down in full by February 15 of each year.

The loan is subject to credit and underwriting approval. As a result, I have heard that the acceptance rate for the loans is much lower than in years past.

If you follow the blog, you’ll recognize that I’m not a fan of these loans. I’ve heard all of the reasons why folks want/need them and I get it. I still find them to be largely abusive. I think they unfairly target the poor and I think that those who offer the loans often skew the benefits of the loans while failing to mention a few money-saving alternatives.

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