What is a Refund Anticipation Loan (RAL) and is it Worth It?


It’s tax season again and if you’re expecting a tax refund you’ll probably want to get your hands on it as soon as possible.

In the past, taxpayers had to wait weeks upon weeks to receive a paper refund check from the IRS, but people sought a faster alternative.

The answer for millions has been the refund anticipation loan.

This option is offered by some tax preparation firms and is essentially a short-term loan taken out against your anticipated tax refund.

How a Refund Anticipation Loan Works


The most common reason people are drawn to refund anticipation loans is that they want to receive their refunds quickly.

Basically, a person would go to a tax preparation firm, a tax professional would do the work and the preparer would receive a code from the IRS indicating whether the taxpayer would be getting the full refund or if something such as back taxes would decrease the amount.  The tax prep firm then could offer the customer a loan based on that expected refund.

For people with financial difficulties, mounting bills, medical issues or anything of the like, a quick turnaround time can make a world of difference.

However, this “convenient” option comes with a price.

Consumer advocacy groups have been decrying refund loans for years now because in addition to the administrative fees that accompany them, the loans come with APR rates that can run as high as 50% to upward of 200%.

Are Refund Anticipation Loans Worth It?

tax refund anticipation loan

A refund anticipation loan may seem like a good idea but they are loaded with fees.

Refund anticipation loans are increasingly losing favor for many reasons.

First, the fees are steep.  Refund anticipation loans in 2009 had an average APR rate of 169%.  A study by the Consumer Federation of America showed that during that same time, more than 7 million taxpayers paid over $600 million to borrow against their own money.

These loans are often regarded as predatory because they target low-to moderate-income citizens.  Since the exorbitant fees are taken out of the refund and not straight out of the taxpayer’s pocket per se, many people look past them in order to get the remaining money faster.

Additionally, the loans are no longer as readily available because the government has stopped providing the comprehensive taxpayer information to tax preparation firms that it once did.  The government also has placed restrictions on some lenders affiliated with these loans, prohibiting them from offering the loans at all.

In fact, 2012 will be the last year you see refund anticipation loans, as the last bank that offers them, Republic Bancorp, will end their RAL program due to FDIC restrictions (they back the loans of Jackson Hewitt and Liberty Tax).  The FDIC believes that by not having the IRS code that tells the tax prep firm whether the filer has any actions against them (that would limit their refund), the loan would be too risky and unsafe.

Options to a Refund Anticipation Loan

Some tax preparation firms now offer the option of getting your refund on their prepaid debit card, but it might not be as beneficial as you’d think.  Make sure to find out if the prepaid debit card has any ATM or other fees and how quickly you’ll receive your refund.

You may also have the option to get your refund on a prepaid debit card you already own.  There are some out there that have minimal fees.  [Really, it doesn't take much to open up a checking account, especially online checking accounts which tend to have few fees.]

The IRS is continually streamlining its processing system, which has led to a much faster refund turnaround and further minimizes the need for a refund loan.

If you submit your return electronically, instead of mailing a traditional paper version, it will considerably shorten the amount of time it takes to get your refund.

In addition, selecting direct deposit will speed the process even more.  According to the IRS, those who combine an electronic submission with direct deposit could see their tax refund in their bank accounts in as little as 8 to 10 days after they file as opposed to 4 to 6 weeks for a traditional paper return.

To Summarize

Refund Anticipation Loans provide tax filers a quick way to get acces to their refund.  But there are usually relatively high fees involved.  These days you can expect a quick refund return if you file electronically and choose to have your refund direct-deposited to your checking account, essentially eliminating the need for a refund anticipation loan.

Emergencies happen and you may need your refund now.  But realize the fees you are paying for the refund anticipation loan.  Work to find ways to avoid needing a loan like this, such as building up an emergency fund.

Sources:

http://www.irs.gov/efile/article/0,,id=205563,00.html

http://www.nclc.org/images/pdf/pr-reports/ral-pr-2012.pdf

http://bucks.blogs.nytimes.com/2012/01/19/after-this-year-no-more-tax-refund-loans/

http://www.responsiblelending.org/other-consumer-loans/refund-anticipation-loans/

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Published or updated April 16, 2013.

Comments

  1. With the quick turnaround of refunds from e-filing, I would think that the need for these should be very low. Many who use them would probably argue but they’d probably have a different defintion of ‘need’ than I do, and that’s part of the issue.

    • Agreed. But I wonder if the tax prep people let the filers know how quick they get their returns anyway and explain the % of their return they are paying for their RAL?

      The other aspect is there are a good number of people out there that don’t have a checking account for direct deposit.

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