Tax Refund Anticipation Loans

Quick Access to Cash, But at a Steep Price

Woman getting money from an ATM

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Refund anticipation loans (RALs) are offered by tax preparation companies to customers who use their services. These loans are typically based on the full amount of the tax refund you're expecting, but loans can be made for a partial amount of your anticipated refund.

A tax refund anticipation loan can be approved in a manner of minutes and the money is usually accessible within a day or two. However, these loans are no longer popular due to several associated drawbacks, and some states have even passed legislation governing them.

Learn more about how refund anticipation loans work and why there is speculation against them.

How Refund Anticipation Loans Work

These loans are provided by independent lenders that work with tax preparation services. RALs are not provided by the services themselves. The lender most likely won't be a bank, but rather a company that provides payday loans and other risky borrowing options. In most cases, these lenders tend to charge exorbitant interest rates.

If you receive a refund anticipation loan, your tax refund will be transmitted from either the tax preparer or the lender, instead of via the IRS. The amount consists of your tax refund minus the cost of interest and fees associated with the loan. When the government sends the actual refund check, the total will be directly deposited to the institution that made the loan. The remaining balance of the refund—if any—will be issued to you.

Your tax refund may not be worth as much as you expected. If this is the case, you'll have to dig into your available cash reserves to cover the remaining balance of your RAL, and your credit can take a hit, too.

There are no credit checks to receive RALs, but tax preparers used to be able to request information from the IRS to determine whether there were any liens against the customer's anticipated refund. An RAL could be denied if there was a lien, which can be placed for back taxes, past-due student loans, and back child support. The IRS stopped providing this information in 2010, discouraging lenders from offering these loans.

RAL Loans Aren't Consumer-Friendly

Many people have used this program for quick access to their money without considering the high interest rates that are inevitably attached. RAL loans tend to come with very high service fees as well.

These loans are essentially a form of short-term financing, so they're not governed under the same laws for interest charges as conventional loans. Much like payday loans, RAL loans have interest rates that can soar to more than 100% APR, as well as charges like electronic filing fees, applications fees, and even a fee to cash the loan check. When all of the possible costs of an RAL are added up, it is estimated that taxpayers can spend more than 10% of their refund just to receive the money sooner.

Before taking out a refund anticipation loan, the lender must provide you with the following information:

  • You are not required to enter into an RAL
  • An RAL is a loan that must be repaid, regardless of the amount of your tax refund
  • How much your expected tax refund will be
  • The fees associated with the RAL that you are expected to pay
  • The interest rate (expressed as an APR) based on how long the loan will be outstanding for
  • The approximate date of when you will get your refund, both with and without the RAL

If you are unsure if taking out an RAL is the best option for you, consider speaking with a tax professional.

Alternative Tax Refund Options

Electronically filing your taxes can provide you with a refund within about 21 days, according to the IRS, if you have the money automatically deposited to your bank account.

Alternatively, you might consider purchasing a pre-paid debit card if you don't have a bank account. Most of these cards can also act as a bank account and can receive electronic deposits, making it easy to receive your tax return.

You can also go the traditional route and apply for a card that has routing numbers available. This way, you'll benefit from the same expediency in receiving your refund. You can access the money immediately after it's sent to your card.

Refund Loans for 2021 Tax Year

The IRS has indicated that Free File, a free tax return preparation service provided through their website, should eliminate the need for RAL loans, and similar products. The program and many commercial tax preparation software products provide electronic filing, enabling refunds to be processed more quickly. As technology becomes more efficient, RALs have ebbed in popularity.

The full Free File service is only available to taxpayers with incomes of $73,000 or less as of the 2021 tax year, the return you'd file in 2022.

Some states, such as Oregon, have taken legislative steps to regulate RAL loans, including implementing disclosure requirements to taxpayers regarding their associated fees and interest rates.

The largest providers of these loans state that the restrictions placed on these services present a burden to taxpayers who need quick access to their refund. There are no indicators as to whether lenders will find another way to offer this type of service in the upcoming tax seasons.

Frequently Asked Questions (FAQs)

Who offers refund anticipation loans?

Refund anticipation loans are offered by third-party lenders. A variation of businesses that prepare and file an individual's tax return typically offer RAL. This could be a tax preparation business, car dealership, furniture store, or in some cases, a bank.

What is an alternative to refund anticipation loans (RALs)?

The most common alternative to applying for an RAL is to e-file and request a direct deposit. By this method, the refund will go directly into your personal checking or savings account. The IRS expects that most taxpayers who file electronically and choose direct deposit will receive their refund electronically within 21 days.

Article Sources

  1. State of Wisconsin Department of Revenue. “Refund Anticipation Loans (RALs).”

  2. Internal Revenue Service. "Tax Preparers, Refund-Anticipation Products, and EITC Noncompliance," Page 2.

  3. State of Wisconsin Department of Revenue. “Refund Anticipation Loans (RALs).”

  4. City of New York Consumer Affairs. “Consumer Rights: Consumer Bill of Rights Regarding Tax Preparers.”

  5. Internal Revenue Service. "2022 Tax Filing Season Begins Jan. 24; IRS Outlines Refund Timing and What to Expect in Advance of April 18 Tax Deadline."

  6. Internal Revenue Service. "IRS Free File: Do Your Taxes for Free."

  7. Oregon Board of Tax Practitioners. "Oregon Revised Statutes Chapter 673: Tax Professionals," Page 10.