Article Image


Simple Interest

Written by Subject: TAXES: Federal
In the land of the free, wage-earners provide an interest-free loan to government bureaucrats for a year, and then pay dearly to get their money back.  Either they invest the time, energy, and anger into filling out tax forms themselves, or pay a tax preparer to do it.

It's like a late Christmas gift from strangers who want to remind you that they own you, your labor, and your property.

Like many Americans, you may have anticipated the potential losses from destroyed printers, smashed calculators, spousal squabbles, and all around damage to the things you own from filling out the forms yourself, and have elected to have a tax preparer do it for you.  Assuming you are due a refund, when it comes time to settle up the bill with the preparer, you are faced with two choices: write a check to the preparer and wait for the IRS to pay or take out a refund anticipation loan and go home with the bulk of the refund in your pocket.

Contrary to the new (old) California governor, Jerry Brown, who has no problem with the state using your money interest-free and failing to teach computation of simple interest in their schools, I know you are capable of making that decision all by yourself.  Maybe, though, since it's fallen out of fashion, a quick refresher on simple interest is in order.

Quickly, take the interest charged, divide by the number of days in the loan, and multiply by 36,500 to get the annual interest rate of the loan.

Ah, but the meddling of Jerry Brown, and other Attorneys General, in short-term loans has made it a bit harder than that.  The national tax preparers will quote you two figures: a loan origination fee, and a loan fee.  You must add those two together, then divide by the amount of the loan, then divide by the days and multiply by 36,500.

Thanks for being the consumer's best friend, Jerry!

Here's the thing.  You're going to get an astronomical interest rate, so let's fudge a little bit and get close enough.

The IRS boasts seven to fourteen days to pay.  So, the loan will be from 1/52nd of a year to 1/26th of a year.  Since we won't know what day the IRS actually pays, we end up with a range of interest rates from highest (paying at 7 days) to lowest (paying at 14+ days).  Canceling out, we can simplify our interest rate calculation:
Total Loan Fees
---------------------------  x 5200 = High Annual Interest Rate
   Total Loan

Total Loan Fees
---------------------------  x 2600 = Low Annual Interest Rate
   Total Loan
So if you are due a $4000 refund and the bank charges $20 for loan origination and $15 for the loan, you will be paying between 22.75% and 45.5% annual interest.  I'll leave for you to determine if your time preference warrants taking the loan at interest rates exceeding credit cards.

But, for advice to parents, I'll defer to the recent wise words of an executive at one of the largest nationwide tax prep firms, “if you sell this product to my kid, I'll kick your ass.”

Perhaps you've noticed, but the young'ens have a very short time preference when it comes to money.  $35 in total fees may not sound like much, but on a $200 loan that's 17.5% of the total, and an annual interest rate of between 455% and 910%.

Parents, please, call or collar your snowflake and teach them to compute simple interest before Subway prints their W-2.  Or, at the very least, loan them the $200 at 200% interest and pocket $15 while exploiting your kid's stupidity.