The “Tax Refund” That Really Isn’t One: It’s a Refund Anticipation Loan
How would you like to pay a super-high price to borrow money that already belongs to you? Sounds ridiculous, right? But that’s pretty much what happens to many folks at tax time in the crazy world of RALs, or refund anticipation loans.

You may be tempted by tax-time advertisements for “Fast Cash Refunds,” “Express Money,” or “Instant Refunds.” These ads will offer to get you your refund in just a day or two, or even on the spot.

Beware! Many of these “fast refunds” are really LOANS, refund anticipation loans. When you get a RAL, you’re borrowing against your own tax refund money. And RALs are often marketed to people who need money the most — low- and moderate-income workers who receive the Earned Income Tax Credit.

Don’t Pay Triple-Digit Interest Rates to Borrow Your Own Refund

RALs are extremely expensive. Loan fees typically range from $30 to $115, which translates into Annual Percentage Rates (APRs) of about 60% to over 700%. If you paid those rates on all your borrowing you’d probably go broke! And all to get your tax refund just a few days earlier than you can for free from the IRS. You’re lining someone else’s pockets with YOUR hard-earned money!

RAL fees, combined with tax preparation, electronic filing, and other fees, can end up eating away a big chunk of your refund.

EXAMPLE
In this example, you have a tax refund of $2500. The Price Comparison of using IRS eFile with Direct Deposit (eFile) and a Refund Anticipation Loan (RAL)
	eFile	RAL
Professional Preparation Fee	Same for Each
RAL loan fee:*	$ 0	$ 110
Electronic filing or RAL Servicing fee:**	$ 0	$ 32
Total:	$ 0	$ 142
Days until you receive your refund	8-15	1-2
This typical RAL has an APR (Annual Percentage Rate)* of 207%** That's an additional $142 to get your money only a week or two sooner!
The Following uses rates from one of the national banks participating in Refund Anticipation Loans. * Average administrative fee for using the RAL or other service. CAYATAX LLC does not charge for electronic filing. *** APR based upon the RAL loan fee of $110 and the $32 filing fee or 10 days. Other charges can substantially increase your APR.

RALs Can Be Hazardous to Your Financial Health

In addition to their high costs, RALs can be risky. Since a RAL is a loan from a bank in partnership with a tax preparer, it must be repaid even if the IRS denies or delays your refund, or your refund is smaller than expected.

If you don’t pay back the RAL, the lender will take actions to hurt your credit rating and may send your account to a debt collector. In addition, when you apply for a RAL, you are giving the lender the right to grab your tax refund to pay for old tax loan debts that the lender claims you owe.

Ways to Save At Tax Time

Here are ways to take a pass on that RAL – most folks don’t need one — and save money at tax time:

E-File with Direct Deposit.
File your tax return electronically (E-file) to speed up your refund. Tell the IRS to deposit the refund directly into your bank account – you provide your account number right on your tax return. You can get a refund in about 10 days this way - without paying one cent extra for a loan.

Get a banking account.
If you don’t have an account at a bank or credit union, open one up to take advantage of direct deposit. You can use a savings account to receive your tax refund, and maybe save some of it for a down payment on a house or a car, or to build a nest egg.

Wait just a bit longer.
Do you really have to get cash from your tax refund today? Can you wait a few days to save $100 or more? If you have an urgent bill to pay, ask for more time until the tax refund check comes from the IRS. Don’t take on a new expensive debt to pay an old bill.

Avoid check cashers.
Check cashers charge an extra fee to cash RAL and tax refund checks. Some check cashers charge up to 7% to cash a RAL check – the average is about 3%. So if you receive a $2,000 refund, it would cost you an average of $60 to cash the RAL check — on top of the RAL fees. A smarter move is to use a bank account.

THE BOTTOM LINE:

“Taxpayers who want quick refunds can get them in two weeks or less by using electronic filing and having refunds directly deposited into their own bank accounts,” says Jean Ann Fox, director of consumer protection for Consumer Federation of America, “That’s a quick refund, and it’s also free.”

Material used with permission form the National Consumer Law Center

Reference Material:

The following is compiled from the National Consumer Law Center, 1001 Connecticut Avenue, NW, Suite 510, Washington, DC, 20036; Phone: 202/452-6252; Fax 202/463-9462

All About the Refund Anticipation Loan (RAL)

Used mostly by low and moderate income consumers, tax refund anticipation loans are extremely high-cost bank loans secured by the taxpayer' s expected refund -- loans that last 8-15 days until the actual IRS refund repays the loan. Even without the costly loan, most taxpayers could have their refund in two weeks or less. RALs are aggressively marketed by income-tax preparation companies. They advertise "Instant Refunds" or "Quick Cash" for their cash-strapped customers who need money in a hurry, and disguise the fact that they are selling advance loans on anticipated tax refunds.

NCLC Special Reports and Press Releases

Letter to Congress Regarding RAL Reform Agenda, April 9, 2007 PDF (71KB)

Report: One Step Forward, One Step Back: Progress Seen in Efforts Against High-Priced Refund Anticipation Loans, but Even More Abusive Products Introduced, February 5, 2007 PDF (1.6MB)

Press Release: Down, But Not Gone: Quick Tax Refund Loans Continue to Gouge Taxpayers and Military, February 5, 2007 PDF (138KB)

Report and Press Release: Pay Stub and Holiday RALs: Faster, Costlier, Riskier in the Race to the Bottom, November 28, 2006 PDF (186KB)

2006 Refund Anticipation Loan Report PDF (373KB) and Press Release - Another Year of Losses: High-Priced Refund Anticipation Loans Continue to Take a Chunk Out of Americans' Tax Refunds, February 2, 2006

Press Release: Debt Indicator Report - Corporate Welfare for the RAL Industry PDF (177KB) and Letter to Treasury and IRS, July 2005 PDF 31KB

Report - Picking Taxpayers’ Pockets, Draining Tax Relief Dollars: Refund Anticipation Loans Still Slicing Into Low-Income Americans’ Hard-Earned Tax Refunds, January 2005 PDF 557KB

Press Release: Still a Bad Deal: Beware Quick Tax Refund Loans, January 2005

Archive: RAL Reports and Press Releases (2002-2004)

Policy Analysis

Letter to Comptroller Dugan regarding Pay Stub and Holiday RALs, PDF (118KB), December 18, 2006

Comments to IRS on Proposed Changes to Privacy Rule for Tax Preparers with Press Release and Sample Short-Form Letter, March 8, 2006 PDF

Archive: Policy Analysis (2002-2004)

Impact Litigation

Complaint and Press Release in Hood v. Santa Barbara Bank & Trust, March 18, 2003

Background Information and Resources (Please note that the following documents are being made available on the NCLC website as a resource. Some of these documents have been written by authors from different organizations, not limited to NCLC.)

National RAL Platform, October 2004 PDF (133KB)

Primer on RALs and Fringe Products PDF (111KB)

Press Release: Still a Bad Deal: Beware Quick Tax Refund Loans, January 2005

Archive: RAL Reports and Press Releases (2002-2004)

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