A Tax Refund Anticipation Loan (RAL) is a type of loan that many tax preparation companies offer, which is essentially an advance on your expected tax refund. A RAL loan can be approved in a manner of minutes and the money accessible within a day or two. Since these loans are secured by your tax return, there are no credit checks or long approval times. When the tax refund arrives at the tax preparer’s office, the loan is paid in full, with interest, and any remaining balance is issued to the recipient. These loans are often attractive since it allows quicker access to those tax refund dollars. Unfortunately, it comes at a cost.
While there are no credit checks to receive these loans in the conventional manner, loan prepares must request information from the IRS to first see if there are any liens against the refund. Liens may be placed against the refund for back taxes, past due student loans, and unpaid child support. In this case, if there are liens against the tax refund, the loan may not be approved.
Why Refund Anticipation Loans Are a Bad Idea
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 rates as are conventional loans. These loans are much like payday loans. You obtain quick short-term financing, but the annualized interest rates could amount to over 200 percent APR. To put it simply, you may end up paying hundreds of dollars just to get your tax refund just a week or so early.
Electronically filing your taxes can provide you with a refund in as little as two weeks, you wont even have time to check your income tax refund status. If you have a bank account you can have the money automatically deposited in even a shorter period of time. 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.
In fact, as shocking as it may seem, if you really needed the refund early, using a high-interest credit card for the source of the funds, and then paid off as soon as your tax return comes in, would cost you virtually nothing since you only carry that balance for a very short amount of time.
News From The IRS About Refund Anticipation Loans
The IRS has recently stated 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 tax payers to provide a profit for these private companies.
The IRS has further explained that the onset of free preparation through their site, electronic filing and the quickness that these refunds are being processed should eliminate the need for these types of loans.
Unfortunately, in recent years consumers spent almost 750 million dollars in fees on these types of loans. An incredible amount for only 8 million loans being processed. This is an average of 950 dollars in fees per loan that generally only lasts a week or two.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
RAL is a type of loan that many tax preparation companies offer beacause of having very high service fees and interesting rates attached. It brings many benefit. I advise everyone should be RAL
While a Sales Director at one of the major credit bureaus we sold lots of credit reports to the industry leader. The lender does not consider typical risk scores in approving the loan as it is secured by the refund.
Liens are public record items found on credit reports, and remain a viable way for lenders to access these data.