Refund anticipation loans (RALs) are offered by tax preparation companies to customers who use their services. A tax refund anticipation loan can be approved in a manner of minutes and the money is usually accessible within a day or two. 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.
These loans are no longer popular, however, due to several associated drawbacks, and some states have even passed legislation governing them.
How Refund Anticipation Loans Work
These loans are provided by independent lenders who work with the tax preparation services. They're 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. They tend to charge exorbitant interest rates.
Your tax refund won't be issued to you when the IRS releases it, so you won't have the option of not repaying the loan. It will be transmitted to either the tax preparer or to the lender. The loan will be paid in full, with interest, from your refund. The remaining balance of the refund—if any—will be issued to you.
You'll have to dig into your available cash reserves if your refund doesn't turn out to be sufficient enough to cover your RAL, or your credit can take a hit.
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. Liens can be placed for back taxes, past-due student loans, and back child support. A RAL could be denied if there was a lien. 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. A refund anticipation loan could cost you a hundreds dollars for borrowing a few thousand dollars for a matter of days.
Better Tax Refund Options
Electronically filing your taxes can provide you with a refund within about 21 days, according to the IRS, and you can have the money automatically deposited to your bank account, further speeding up the process.
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.
Apply for a card that has routing numbers available, and 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 in 2020
The IRS has indicated that Free File, a free tax return preparation service provided through their website, should eliminate the need for these types of loans. The program and many commercial tax preparation software products provide electronic filing, so refunds are being processed more quickly. RALs have indeed ebbed in popularity with the options.
The full Free File service is only available to taxpayers with incomes of $72,000 or less as of the 2020 tax year, the return you'd file in 2021.
According to the U.S. Census Bureau, consumers spent at least $648 million in fees on loans of this nature in 2014 when these loans were still highly popular.
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 presents 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.