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Roadmap of a tax refund anticipation loan.

Annual interest rates of 40% to 700%.
Loans are made through tax preparers by banks but only if you have a tax refund coming to you.
Loan amount is based upon the amount of your tax refund.
You sign the right to your refund over to the bank.
If your tax refund doesn’t pay the full loan amount, the lender will collect by other means or wait until the next tax year to take your refund.

Tax Refund Anticipation Loans

What’s in the name?

These loans are also called “RALs” (refund anticipation loans), “fast cash refunds” or “express money” or “instant refunds.”

Who makes these loans?

Banks partner with tax preparation companies to make these loans to consumers who have the right to a tax refund.

How do tax refund loans work?

The tax preparer keeps a fee, the bank gets a fee, and you receive your tax refund a few days sooner than you would have if you electronically filed your return yourself. Your refund then goes directly to the bank, not to you. Then, the bank takes its fee and also turns over a fee to the tax preparation company. The bank’s fee averages about $100. The annual percentage rate for a RAL ranges from about 40% to 700%, depending on the size of the refund. On top of that, you pay the tax preparation fee and a broker fee to your preparer for arranging the loan.

RALs are not based on the your ability to repay. Rather, your refund is the guarantee for the loan. If your tax refund is denied, smaller than anticipated, or paid to other creditors (such as the IRS for past taxes or to your ex-spouse for child support), you will owe the bank the loan, your credit rating will be hurt, and the bank may send a debt collector to hunt you down.

What are the abuses?

Expensive and unnecessary: RALs are very expensive but totally unnecessary loans. If you file your tax return on the internet or file it electronically through a tax preparer, you will get your refund in about 10 days. RALs save you about 6 or 7 days—a week or less!—for a very high price.

RALs reduce the help that comes from the Earned Income Tax Credit (EITC): RALs are marketed to low and moderate income taxpayers. They hit people entitled to the earned income tax credit the hardest. The EITC comes in the form of a check from the IRS to boost your income if you work and have children. This money helps lift you and your family above the poverty line. However, in 2004 RAL fees siphoned about $700 million from EITC earners to lenders and tax preparers.

Are RALs legal?

Generally, states cannot stop banks from charging whatever interest rate they want for RALs. Some states may decide to regulate tax preparers who broker these loans. In the meantime, there is little law on the books to stop the high cost (usury) involved with RALs.

What can you do if you have a RAL problem?

AFFIL can’t guarantee that help is on its way, but these are our best suggestions.

File a complaint: Even if the RAL loan is legal, the annual percentage rates are immoral. If you didn’t understand that you were getting a loan, the loan process may have misled you. You can file a complaint with an appropriate agency in your state. You should think about doing this for two reasons: first, there may be a violation of your state’s unfair and deceptive practices law. Second, you can let your state agency know that you don’t like these loans because they are too expensive.

Contact your state legislator: You may also write to your state legislator and ask that your state regulate these loans to better protect consumers.

Contact your federal legislator: You may call or write to your U.S. Congressperson or Senator. It is important that they know your story so they can decide whether changes in the federal laws need to be changed.

Find a lawyer: AFFIL is not a lawyer referral service and cannot refer you to a specific lawyer. If you want to talk with a lawyer who might help you with your debt problems, you can review the list of members of the National Association of Consumer Advocates (NACA). You can also contact your state bar association’s lawyer referral service.

Where can I find a better small loan product?

If you can, sit tight and wait for a few extra days! RALs speed up getting your refund by less than week, so if you have a RAL you may not need a loan at all.

However, if you do need more cash beyond the amount of your tax refund, you can find tips about reasonable loan products through the Consumer Federation of America, an AFFIL partner.