Tax Refund Anticipation Loans - RAL

Tax Refund Anticipation Loans are short-term cash advances against a customer's anticipated income tax refund. But the loans are offered at high interest rates and speed up refunds by just a week compared to what consumers can expect by filing online and having their refunds deposited directly into their banking accounts. Tax preparers and lenders strip about $1.8 billion in fees each year from the $30 billion in earned-income tax credits paid to working parents, according to the Brookings Institution Center on Urban and Metropolitan Policy. For complete article in pdf format, click link: http://www.brook.edu/es/urban/publications/berubekimeitcexsum.htm

Links to additional articles about RALS:

The Price of Paying Taxes: How Tax Preparation and Refund Loan Fees Erode the Benefits of the EITC. For article click link:
http://www.brook.edu/es/urban/publications/berubekimeitcexsum.htm

All Drain, No Gain: Refund Anticipation Loans Continue to Sap the Hard- Earned Tax Dollars of Low-Income Americans
NCLC/CFA 2004 Refund Anticipation Loan Report by
Chi Chi Wu, National Consumer Law Center
Jean Ann Fox, Consumer Federation of America
January 2004 Executive Summary - For complete article see: http://www.consumerlaw.org/initiatives/refund_anticipation/content/2004RALReportFinal.pdf

Center for Responsible Lending: This site publishes several articles on predatory lending. For article about refund anticipation loans, click on following link: http://www.responsiblelending.org/practices/taxrefund.cfm

Article published by Associated Press on December 1, 2004 about abuses among payday lenders that have moved their operations online: Payday Lenders Lurking Online

National Consumer Law Center, Inc. (overview of tax refund products) http://www.nclc.org/initiatives/refund_anticipation/

What Is a Refund Anticipation Loan (RAL)?

A Refund Anticipation Loan (RAL), otherwise known as an “instant tax refund loan,” are high-cost, short-term loans that you apply for through your tax preparer and it is secured by your expected tax return. When you receive an RAL, your tax preparer lends you the amount of the tax refund that you expect, minus interest and fees. Then, when the government sends your actual refund check, it is direct deposited into the bank that made the loan. Because the loan is paid back when you receive your tax refund, the term of an RAL is short – usually 7 to 14 days.

It may sound like an easy way to get your tax refund a little faster. But make no mistake: an RAL is a LOAN, with all of the costs that come with taking out a loan – and then some. Unlike a traditional loan, the interest rate (the annual percentage rate or APR) for RALs is sky high – in many cases more than 200%. Taking out one of these loans can be a costly trap for consumers who don’t realize that an RAL is not a short cut to getting a refund but simply an outrageously expensive short-term loan. Some lenders will even allow you to borrow more than the expected amount of your refund. But the high interest rate applies for the entire loan, not just the amount of the refund. Consumers who borrow beyond their refund at these rates are at risk of not being able to pay back the loan.

Who Takes the Hit?

According to a recent study by the Consumer Federation of America and the National Consumer Law Center, taxpayers lost more than $1 billion in loan charges and fees in 2002. The consumers paying the highest price for these RALs are low-income families that cannot afford to pay a significant portion of their tax refund in loan fees and interest. In fact, the same study found that 40% of RAL customers qualify for the Earned Income Tax Credit. In 2002, these customers paid an average of $248 in costs and fees to receive an RAL on expected tax refunds that averaged $1,980.

It is a vicious cycle of fees for a consumer who needs an instant refund or RAL. To get an RAL, consumers often pay a loan fee, an electronic filing fee, a document preparation fee and a tax preparation fee. Then when the consumer receives a loan check, he often pays an additional check-cashing fee.

It Is Your Refund – Here’s How to Keep More of It!

You probably do not need an RAL. If you file your tax return electronically, you can get your refund very quickly – in approximately two to three weeks – without getting a loan. There are organizations that will help you. You can find an organization willing to help you prepare and file your taxes for free by calling the Northern Kentucky Asset Building Coalition at 850-572-6578 or visiting this Web site for resources near you. See Free Tax Preparation Sites for locations.

Don't pay to borrow your own money - The "tax refund" that some tax preparers offer to pay you in advance really isn't one:

WHAT DOES THE RAL REALLY COST YOU ????   

DON'T PAY TRIPLE-DIGIT INTEREST RATES TO BORROW YOUR OWN MONEY!!!

Tax Refund Anticipation Checks

Refund Anticipation Checks (RACs). RACs avoid many of the worst features of RALs because they are not loans. Instead, consumers pay to have a temporary account established, allowing them to receive the refund with the speed of direct deposit – generally 8-15 days. Consumers pay a fee to the bank and a separate fee to the tax preparer, totaling about $60, not including the tax preparation fee.

Once the refund is deposited, the preparer subtracts the tax preparation and RAC fees, cuts a check to the taxpayer for the remainder of the refund and closes the account. In addition to being promoted as a separate “rapid refund” product, RACs serve as a default product if a consumer is denied a RAL.