A cash tax refund anticipation loan, also known as a RAL, is a way for a tax filer to get their refund immediately. The tax preparation company prepares the consumer’s tax return, calculates their tax refund, and offers cash to the individual on the spot — minus a few fees. In return, the company keeps the customer’s refund when the Internal Revenue Service (IRS) issues it.
Millions of tax filers take advantage of these quickie tax loans every tax season. But there are several reasons why this kind of loan is not a wise financial decision.
Who Gets Refund Anticipation Loans?
Consumer advocacy groups like the National Consumer Law Center (NCLC) caution consumers to be wary of refund anticipation loans — especially since they’re aggressively marketed to Earned Income Tax Credit (EITC) recipients, who tend to be lower-income individuals and families.
There are two main reasons why RAL providers focus on low-income taxpayers:
- Cash Flow Issues. Because people in low-income brackets often have cash flow problems, a tax refund can be an opportunity to address that issue for a month or two.
- No Checking Account. The fastest way to get an IRS tax refund is via direct deposit. But according to the FDIC, more than 7 million U.S. households are unbanked, meaning they don’t have a checking account. A refund anticipation loan allows them to get their cash in a matter of days, while it typically takes six to eight weeks to receive a paper check from the IRS.
RALs can help taxpayers get their hands on their refunds faster. But this convenience comes at the cost of hefty interest rates and high fees.
Many major commercial tax preparation chains offer tax refund advance loans, including Jackson Hewitt, H&R Block, and Liberty Tax. However, even taxpayers who prepare their own returns can get RALs. Online tax filing services, including TurboTax and TaxAct, also offer refund loan options.
How Do RALs Work?
While taxpayers should always review the terms of a specific refund anticipation loan before using one, here is how a RAL typically works:
- A tax preparation provider prepares your tax return, calculates your estimated refund, and electronically files your return.
- The RAL provider offers a loan based on a percentage of your anticipated tax refund.
- If you accept the offer, you receive the loan amount as a deposit into a bank account or on a prepaid debit card.
- When the IRS issues your refund, it is deposited into that bank account or prepaid debit card.
- The RAL provider deducts the loan amount, plus any interest and fees, from that bank account.
You get a check without having to worry about making loan payments. Sounds like a good deal, right? Think again. Even RALs advertised as “no-fee” can come with risks and costs.
Why Are Refund Anticipation Loans a Bad Idea?
There are several reasons to think twice before using RALs.
The most obvious argument against getting a refund anticipation loan is the cost. According to the NCLC, RAL fees range from $29.95 to $64.96, depending on the lender and type of RAL. Plus, if the loan funds come on a prepaid credit or debit card, the card may have hidden fees that further eat away at your refund.
Even “no-fee RACs can come with fees. In many cases, lenders charge tax preparers a fee for each “no-fee” RAL. The tax preparers may pass that cost through to you in the form of higher fees for preparing your tax return.
If you pay interest on the loan, the NCLC points out that APRs on these loans typically carry interest rates at or just under 36%.
Many tax preparation companies require taxpayers to e-file a tax return with them before getting approved for a RAL. After filing their tax return — and essentially getting locked into working with the preparer — the lender may deny the loan due to issues with the consumer’s credit.
According to the NCLC, this creates an incentive for the tax preparer to promise customers that they’ll qualify for a loan, even if the preparer has no idea whether or not the lender will actually approve the loan application.
In theory, a refund anticipation loan is paid off when the tax preparation service receives your tax refund check from the IRS. However, your refund may be less than originally anticipated — for instance, the IRS may seize your refund to cover past-due child support or a state income tax debt. In that case, you’ll be held responsible for the remaining amount.
Alternatives to Refund Anticipation Loans
If you’re so anxious to get your tax refund that you’re willing to pay 30% or more in interest to do so, you likely have financial problems that a refund anticipation loan could make worse.
To avoid the temptation of getting a RAL:
- Consider Free Tax Preparation Options. The IRS has several options to help low-income taxpayers file a tax return. If you’re comfortable preparing your own tax return and have income at or below $72,000, the IRS Free File program can connect you with tax filing software companies that provide their products for free. If going the DIY route isn’t your thing, visit a Volunteer Income Tax Assistance (VITA) site. The IRS sponsors these sites during tax season to provide free help for consumers. Keep in mind, in-person options may be limited due to the COVID-19 pandemic, and the location finder is only available from February through April.
- File Your Tax Return Electronically. The fastest way to receive a tax refund is e-filing your return and having your refund deposited directly into your bank account. According to the IRS, e-filers typically receive refunds in less than 21 days. Keep in mind that, by law, the IRS cannot issue refunds before March if you claim the Earned Income Tax Credit or the Additional Child Tax Credit.
- Direct Deposit Your Refund. If you don’t have a bank account, consider opening one. Many online banks offer free basic checking accounts with low or no minimum balance requirements. If you visit a VITA site, some sites can even help you open a bank account. If you can’t get a checking account, you can still have your tax refund deposited to a prepaid credit card.
- Check Your Refund Status. After you file your return, you can check your refund status at IRS.gov. Make sure your financial institution posts the refund to your account before making any major purchases or paying bills.
While you wait on that refund, consider making a budget, finding ways to pay down any existing debt, and maybe even finding ways to make some extra cash. These steps can help improve your finances so you don’t have to turn to risky financial products in the future.
Try to steer clear of refund anticipation loans. Instead, take steps to ensure you aren’t financially reliant on your tax refund or adjust your federal income tax withholding so you have more money in your pocket each month instead of a big refund come tax time.
Consider a refund anticipation loan only if the benefits outweigh waiting for your tax refund to come in using the normal channels. Consider all of the costs involved to help you make the best decision for your financial situation.