The Truth About Refund Anticipation Loans

The “Tax Refund” That Really Isn’t One: The Refund Anticipation Loan (RAL)

How would you like to pay a super-high price to borrow money that already belongs to you? Sounds ridiculous, right? But that’s pretty much what happens to many folks at tax time in the crazy world of RALs or refund anticipation loans.

You may be tempted by tax-time advertisements for “Fast Cash Refunds, “Express Money,” or “Instant Refunds.” These ads will offer to get you your refund in just a day or two, or even on the spot. Beware! Many of these “fast refunds” are really LOANS, refund anticipation loans.

When you get a RAL, you’re borrowing against your own tax refund money. RALs are often marketed to people who need money the most — low– and moderate-income workers who receive the Earned Income Tax Credit.

Don’t Pay Triple-Digit Interest Rates to Borrow Your Own Refund

RALs are extremely expensive. In 2002, the average taxpayer paid about $75 in RAL fees, which translates into an Annual Percentage Rate of 143.6%. You’re lining someone else’s pockets with YOUR hard-earned money just to get your refund a few days earlier than you can for free from the IRS!

RAL fees, combined with tax preparation, electronic filing and other fees, can end up eating away a big chunk of your refund.

If your RAL is directly deposited onto a prepaid credit card, it is likely that you will be charged an initial fee, a fee for point-of-sale transactions, an ATM fee and an “inactivity” fee in addition to the fees paid for the RAL.

RALs Can Be Hazardous to Your Financial Health

In addition to their high costs, RALs can be risky. Since a RAL is a loan from a bank in partnership with a tax preparer, it must be repaid even if the IRS denies or delays your refund, or your refund is smaller than expected. If you don’t pay back the RAL, the lender will take actions to hurt your credit rating and may send your account to a debt collector. In addition, when you apply for a RAL, you are giving the lender the right to grab your tax refund to pay for old tax loan debts that the lender claims you owe.

Ways to Save At Tax Time

Here are ways to take a pass on that RAL– most folks don’t need one—and save money at tax time:

E-File with Direct Deposit –

File your tax return electronically (E-file) to speed up your refund. Tell the IRS to deposit the refund directly into your bank account—by providing your account number right on your tax return. You can get a refund in about 10 days this way—without paying one cent extra for a loan. Some of the free tax preparation programs (called VITA or TCE sites) can file taxes electronically. If you have internet access, you may be able to get free tax preparation and free electronic filing at www.irs.gov/efile

Get a bank account –

If you don’t have a bank account, open one up to take advantage of direct deposit. Use a savings account to receive your tax refund, and maybe save some of it for a down payment on a house or a car, or to build a nest egg.

Wait just a bit longer –

Do you really have to get cash from your tax refund today? Can you wait a few weeks to save more than $100? If you have an urgent bill to pay, ask for more time until the tax refund check comes from the IRS. Don’t take on a new debt to pay an old bill.

Avoid check cashers –

Check cashers charge an extra fee to cash RAL and tax refund checks. Some check cashers charge up to 7% to cash a RAL check—the average is about 3%. So if you receive a $2,000 refund, it would cost you and average of $60 to cash the RAL check—on top of the RAL and tax preparation fees. A smarter move is to use a bank account.

Contact the Taxpayer Advocate Service –

If you are suffering an economic hardship and need your refund quickly, the Taxpayer Advocate Service may be able to assist you. Call 1-877-777-4778.

Beware of Unnecessary Financial Products

In addition to RALs, tax preparers and their bank partners offer another high cost tax refund product that is often called a “Refund Anticipation Check” or “Refund Transfer.” While this product is not a loan for the amount of the expected refund, it is a high cost financial product in which you pay a substantial fee (approximately $28) for the privilege of a temporary bank account into which the IRS direct deposits the refund check. After the direct deposit of your refund, the bank issues you a paper check and closes the account.

Buyer BEWARE! Even Retail Businesses Want a Piece of Your Refund

Tax time is also a boom time for used car dealers, who take advantage of “instant” tax refunds for use as down payments on vehicles. Dealerships use service providers that will prepare and file your tax return, and arrange for a refund anticipation loan through a bank. The dealer uses the RAL check as the down payment. You could pay fees that range from $150 to $200.

Rent-to-own stores have also found a way to benefit at tax time by offering “instant” tax refunds and RALs to their customers. The store gives the customer a stored value card which can be used almost anywhere that accepts MasterCard, as well as to gain access to cash at select ATM’s. An incentive, such as a coupon for two weeks of free rental of an item at a rent-to-own store when you pay for any new rental with the CashCard, may be offered.

EXAMPLE*

For a tax refund of $2,000, you might pay to get a RAL:

RAL loan fee: $75

Electronic filing fee: $40

Document Preparation or “Application/Handling” fee: $33

Tax preparation fee: $100

TOTAL: $248

This is OVER 10% of your refund!

*Amounts are based on reported charges for 2002

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This handout is meant to give you general information and not to give you specific legal advice.Prepared by Community Legal Aid Services, Inc. Updated April, 2012. CE-24-BR108-CLAS