Tax refund loans revamped, resurrected
Fast, free money. That’s what H&R Block, the nation’s largest tax-preparation chain, is advertising on giant banners outside its storefronts and in TV commercials featuring Jon Hamm of “Mad Men”: “You could get a refund advance of up to $1,250.” It is the first time in six years that the company has offered to front customers some money from their anticipated refund.
Two of H&R Block’s biggest rivals, Jackson Hewitt and Liberty Tax Service, are hyping nearly identical offers — dangling up to $1,300 cash.
The nation’s big tax-preparation companies are so desperate for customers that they are willing to put money up front — with absolutely no hidden fees or interest charges, and no ironclad guarantees that the companies will get paid back.
H&R Block, for one, has arranged a $1.65 billion funding line for its refund advances, giving pause to some of the Wall Street analysts who follow the company.
Two dynamics are harming H&R Block and its competitors. One is the widespread availability of cheap (and even free) online tax-filing alternatives.
The other is a series of regulatory moves that clamped down on refund anticipation loans, or RALs as bankers call them, which the companies formerly relied on to lure in people who needed cash.
The loans typically came with high interest rates and fees, which customers paid on top of the money charged for tax preparation. By 2012, such loans had become nearly extinct after a regulatory crackdown that forced most major banks out of the market. Consumer advocates, who had seen the loans as predatory, were thrilled.
The same advocates are looking warily at the resurrection of this type of loan. The new generation of refund advances are really, truly, no-hidden-fine-print free, though the tax preparers may use them to cross-sell other services. Customers who qualify will be advanced a portion of their tax refund within a day or so, with no fees or interest, though they will still need to pay for the provider’s tax preparation services, which can cost hundreds of dollars.
Struggling tax companies acknowledge that they are using the loans as a come-on to make up for the loss of walk-in traffic and people who have migrated to TurboTax and its alternatives. Each loan will cost H&R Block an average of $32 to $36, according to regulatory filings — which the company will chalk up as a customer-acquisition expense.
“The early part of the tax season is really driven by consumers who need their refund to live,” said David Prokupek, chief executive of Jackson Hewitt.
“Our goal is to help them get fast access to their money, at no cost. This has some risk for us, but we needed to do something in the stores that you can’t get online.”
The loan offers are open to all customers, but they are particularly aimed at low-income Americans who live paycheck to paycheck and rely on their tax refund as their biggest annual cash infusion. For many people, it is a critical way to pay off holiday debt, catch up on overdue bills or cover emergency expenses like car repairs.
Those taxpayers typically file their returns as early as possible. This year, tax filing season starts Jan. 23 and runs through April 18.
But millions of people will not be able to collect their refund until late February because of a new federal rule that delays refunds for filers claiming certain tax credits.
“We think that’s going to cause real pain,” said Brad Hanson, president of MetaBank, the lender that is funding H&R Block’s and Jackson Hewitt’s loans. “We’re looking to bridge that gap, in a responsible way.”