Tax Refund Anticipation Loans

Quick Access to Cash, but at a Steep Price

Man signing a loan contract based on his anticipated tax refund
••• Witthaya Prasongsin / Getty Images

A Refund Anticipation Loan (RAL) is a loan offered by many tax preparation companies to people against their income tax return refund. A tax refund anticipation loan can be approved in a manner of minutes and the money accessible within a day or two. These loans are based on the full amount of the tax refund. Loans can be had for the entire amount or a partial amount of the anticipated refund.

When the check arrives at the tax preparer’s office, the loan is paid in full, with interest, and any remaining balance is issued to the recipient. Many people use this program for its quick access to money without considering the high-interest rates attached.

While there are no credit checks to receive these loans conventionally, loan prepares must request information from the IRS to see if there are any liens against the refund. Liens may be placed against the refund for back taxes, past-due student loans, and back child support. If a lien is against the refund, a refund anticipation loan may be denied or only given for the balance of the refund.

Why RAL Loans Are Not Consumer-Friendly

People that are considering a tax refund anticipation loan should try to avoid the program. RAL loans have very high service fees and interest rates attached. Because these loans are short-term financing, they are not governed under the same laws for interest charges as are conventional loans. Much like a payday loan, a RAL loan has interest rates that soar well over 200% APR. As an example, a refund anticipation loan could cost you a couple of hundred dollars for borrowing a few thousand for five days.

Better Tax Refund Options

Electronically filing your taxes can provide you with a refund in as little as two weeks. If you have a bank account, you can have the money automatically deposited in even a shorter period. The need for these loans is no longer necessary. Consumers wishing to receive their money faster than two weeks may wish to consider a different financial option to avoid these high-interest rates.

If you do not have a bank account, you may consider purchasing a pre-paid debit card. Most of these cards can also act as a bank account and can receive electronic deposits. Apply for a card that has routing numbers available, and you will benefit from the same expediency in receiving your refund. These online banks are very useful for people that have had credit issues in the past. Once the money has been sent to your card, you can access it immediately.

News From the IRS About Refund Loans

The IRS has issued a statement saying it will no longer provide consumer information to the refund processing companies. This information about tax liens is crucial to their ability to provide RAL loans. The IRS has stated that by providing this service to these companies, they are infringing on the privacy of the taxpayers to provide a profit for these private companies.

The IRS further explained that the onset of free preparation through their site, electronic filing, and the quickness with which these refunds are being processed should eliminate the need for these types of loans.

In 2009, consumers spent almost 750 million dollars in fees on loans of this nature. That figure is an incredible amount for only 8 million total loans processed loans. It is an average of 950 dollars in fees per person on a loan that generally only lasts a week or two.

The largest providers of these loans—H&R Block and Jackson Hewitt—are up in arms. They and other providers state that the termination of these services is a burden to taxpayers that need quick access to their refund. As of this time, there are no indicators if the lenders will find a new way to offer this type of service in the upcoming tax seasons.