Tax Refund Loans
A Refund Anticipation Loan (RAL) is a loan made by a lender that is based on and usually repaid by an anticipated federal income tax refund. They are offered starting in January through the end of the tax season in April.
Taxpayers are generally charged fees and interest to obtain a RAL. Just like any other loan, the full amount of the RAL must be repaid even if the refund is lower than the amount anticipated.
How does the RAL process work?
When a taxpayer receives a RAL, the tax preparer lends the taxpayer the amount of their tax refund less the cost of interest and fees for the loan. When the government sends the actual refund check, it is directly deposited into the bank that made the loan. If the refund is smaller than anticipated due to deductions for items like unpaid child support or traffic tickets, the full amount of the loan must still be repaid.
How much does a RAL cost?
The cost of a RAL can vary widely and consumers should understand all the costs associated with this type of loan. RAL’s often carry extremely high interest rates. In addition, there are often other charges like electronic filing fees, application fees and a fee to cash the loan check. When all the costs of an RAL are added up, taxpayers can be spending more than 10% of their refund just to get the money a few days sooner.
Be sure to read the fine print and ask a lot of questions before signing up for a RAL. Remember that most taxpayers who file electronically receive their refunds in less than 10 days. Paying the costs associated with a RAL could be a large price to pay for getting your money a few days quicker. Before deciding on a RAL, make sure you know the answers to the following questions:
- What is the interest rate?
- What fees are you being charged?
- What happens if your tax refund is less than you thought it would be?
Alternatives to RALs
There is a simple way to avoid the high costs and risks of RALs and get your tax refund back quickly at the same time. Consider E-filing your taxes and request direct deposit. When a taxpayer e-files, they can ask the IRS and the state to electronically deposit the refund directly into their personal checking or savings account. It typically takes 10 business days to receive funds from the IRS and about 4-5 business to receive a deposit from the state.