Cash strapped consumers are more likely than ever to take out loans against their expected income tax refunds. Tax preparers claim the loans eliminate the wait for a check from the federal government. They often market the so-called “instant refund loans” or “refund anticipation loans” as early tax refunds. But they’re not.

They’re questionable, short-term loans that give taxpayers the option to pay a ridiculously high interest rate to borrow their own money. Taxpayers may pay $100 or more in loan fees-the equivalent of paying annual interest rates of 60% to more than 700%, depending on the amount of the refund.

Consumer advocates argue many consumers take out the loans because they’re unaware of lower-cost options to get their refunds in as little as 10 days.

Just this week, H & R Block Inc., the largest tax preparer nationwide, agreed to pay $4.85 million for allegedly using deceptive marketing to sell tax refund loans in California. The agreement prohibits H & R Block from describing the so-called refund-anticipation loans as early tax refunds, said California Attorney General Jerry Brown.

US Treasury officials estimate about 10 million taxpayers took out RALs in each of the past three tax seasons. Many of the borrowers qualify for the Earned Income Tax Credit, a federal program designed to help low-wage workers.

With the state of the economy, it’s understandable that consumers are eager to get their tax refunds as quickly as possible. But there are better options that shelling out the fees for tax refund loans.

• File as early as possible. Start gathering everything you need to file your taxes now so you can prepare your return as soon as you receive your W-2 forms from your employer.
• Access your accounts online. You may be able to get all the information you need from employers, banks and mortgage lenders electronically, eliminating the need to wait for documents in the mail.
• File your taxes electronically. You can get your refund in as few as 10 days when you file electronically and have your refund directly deposited in your bank account.
• Reduce tax preparation and filing costs. You may qualify to prepare your return and file electronically free of charge through the IRS Free File program. Free File is a public-private partnership between the IRS and the Free File Alliance LLC, a consortium of tax-preparation companies. Taxpayers who meet the income, age and residency requirements set by the participating private companies have access to no-cost electronic tax preparation and e-filing. Some companies also let participants prepare and file their state income taxes free of charge. The income guidelines vary from year to year. But last year, taxpayers with adjusted gross income as high as $54,000 qualified. Details about this year’s program will be posted on the IRS site Jan. 16.

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