Refund Anticipation Loans

Definition and Overview of RAL's

Tax Refund
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Definition: A refund anticipation loan is like an advance on your tax refund. Instead of waiting for your refund from Uncle Sam, you can get the money more or less instantly in the form of a loan from your tax preparer. Often marketed as "instant refunds," these products give you fast cash at a relatively high price.

How it Works

When you get a tax refund loan, you are "approved" based on the expectation that you'll get a refund from the IRS.

Your tax preparer might provide a prepaid debit card with the funds loaded onto it, a paper check, or an electronic deposit to your bank account.

When the IRS processes your return, any refund due to you is paid to your lender. The loan gets wiped out, and you're done.

Cost

Tax refund loans are expensive. You're really only borrowing for a few weeks, but you have to pay fees and interest on the loan. Those fees, when converted to an annual percentage rate, are generally quite high. In essence, you're paying fees to get your own money more quickly than you'd otherwise get it.

Tax preparers generally charge a flat fee to process your refund anticipation loan. Those fees might be around $30 for a Federal refund, plus additional fees for state refunds. Plus, you might have to pay extra, depending on how you get the funds (an additional fee for a printing a check or providing a debit card is not unheard of).

Risks

Aside from the high cost, you never know for sure how much you'll get from the IRS. If your tax preparer miscalculates or the IRS disallows any of your deductions, you might end up with less money than you borrowed -- but you still have to pay off the loan. What's more, the IRS might withhold funds for things like unpaid child support or tax liens.

The lender knows that your loan will be repaid because they prepared your tax return -- they know how much to expect from your refund. Therefore it's a low risk loan for your lender -- but you pay as if you were betting the farm.

When you add up the fees relative to the amount most people borrow, these loans can end up costing roughly as much as payday loans (which are notoriously expensive).

Better Options?

In many cases, you're better off just waiting for your refund. The IRS estimates that you'll get your refund in roughly 10 days if you e-file and use direct deposit. Paying $40 or more for 10 days is a lot of money.

If you absolutely have to borrow immediately, look into the alternatives. The tax preparer does your taxes -- they're not the best place to get a loan. You pay a price for convenience when you use a tax refund loan, but other lenders will gladly compete for your business and give you a better deal.

In the future, it's best not to leave all of your money with the IRS. You're giving the government an interest-free loan, and you're paying hefty fees to get the money quickly. Instead, set up your withholding correctly so that your refund (or any tax due) is minimized every year.

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