Instant Tax Refund Comes at a Price
Get your tax refund instantly
The TV and radio advertisements are clear: “get your refund instantly” and to “never wait for your tax refund”. It’s easy too- your tax refund is loaded onto a prepaid credit card or you can opt to receive your refund by cheque. The tax preparers aren’t secretive about their fees, particularly as the maximum is set out by Canada Revenue Agency: 15% on the first $300 and 5% on the rest of your refund.
An average refund in 2012 of $1,641 (and the average higher since then) means you pay $112.05 in order to walk out with $1,528.95 in hand. Sounds like a great deal? Money now is better than money later, right? It’s only $112.05.
How long would it take to get your tax refund?
According to Canada Revenue Agency, a refund generally takes as little as eight business days to be processed, if filed electronically. Choose to let CRA direct deposit your refund and according to CRA you could get your refund even faster. Let’s assume that to receive your refund takes two weeks including the time to mail you the cheque.
Understanding annual percentage rate (APR)
The important concept at play is the annual percentage rate. If you borrow $100 and pay back $101 at the end of a whole year, your APR is 1%. If you borrow $100 for a day (instead of a year) but when you pay back the loan you pay an extra dollar, then you’re paying an APR of 365%. In terms of dollars, borrow $100 every day for the next year and pay back $101 the following day, you’ll have paid $365 in interest over the course of an entire year.
The APR of getting your tax refund early
Lets recall that most credit cards carry a APR of between 18% and 24%. At 24% (about 2% per month), charging $1,528.95 to your credit card would result in interest charges during the two weeks of just $14.11 (under 0.92%) or $366.95 per year (24%). This calculation ignores compounding interest and the interest-free period known as ‘grace days’ in order to simplify our calculations.
Compare that to your tax refund loan: $112.05 is your cost of borrowing $1,528.95 for just two weeks which works out to an interest rate of about 7.3%. Multiply by 26 two-week periods a year to reach an annual cost of borrowing of $2,913.30 or 190.54%! This amount is nearly 8x the cost of borrowing from your credit card.
Think twice before you take your tax refund on the spot
Ask questions about the real cost of taking your refund early. Tax preparers make millions on what are effectively short term loans. Theses loans are at interest rates higher than payday loans and surely higher than your credit card.
If you need your tax refund early, you might need financial help
In most cases, these advances seem like a good idea however reduce the amount of money in your pocket at the end of the day. If you’re needing your tax refund advance to cover your bills, it’s time to do something about your financial situation. Call us today for a free no-obligation assessment of your financial situation. Consumer proposals, bankruptcy, or even credit counselling are some of the tools available for you to take control of your financial situation and say goodbye to these expensive advances.