Refund Anticipation Loans (RAL) are high-cost bank loans secured by a taxpayer’s anticipated tax refund. These loans last about one to two weeks until the IRS refund repays the loan. The cost of these loans is demonstrated in a very informative brochure by the National Consumer Law Center (NCLC). The brochure demonstrates the high cost of RALs with the following example:
Typical finance charges for a RAL, assuming a tax refund of $2000:
RAL loan fee: $75
Electronic filing fee $40
Fee to Tax Preparer $100
Total $215
In summary, the loan costs comprise over 10% of your refund; in traditional loan terms, this RAL has an APR of 142%.
The Consumer Federation of America (CFA) and NCLC suggest that consumers should avoid the necessity of RALs by electronically filing their income tax returns and at the same time requesting that their refund be deposited directly into their bank account. Under these circumstances, the refund is typically received within two weeks.
The CFA and the NCLC warn that, in addition to the high cost of borrowing with a RAL, there are potential complications A RAL must be repaid even if the tax refund is denied, smaller than expected or frozen.
In short, patience is the companion of wisdom. (Saint Augustine, 354AD – 430 AD)
