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 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.
What do we know about the RAL industry?
A small handful of banks make these loans through tax preparation companies.
How much do RALs cost consumers nationally?
In 2004, taxpayers paid about $1.24 billion in fees to get back their own money from the IRS.
More information about refund anticipation loans
AFFIL Partners
California Reinvestment Coalition
Your Tax Refund Money is Yours, Avoid Tax Refund Loans (Available in Spanish and English; available in Polish at the Woodstock Institute Site )
Refund Anticipation Loans Fact Sheet
Center for Responsible Lending
RALs Briefs and Factsheets
Consumers Union
Don’t Pay Triple-digit Interest to Borrow Your Own Tax Refund
CRA-NC
Anti Refund Anticipation Loan Campaign
National Consumer Law Center
Don't Pay to Borrow Your Own Money: The Risks and Costs of Tax Refund Anticipation Loans (Available in English, Chinese, Spanish, Korean, Russian, and Vietnamese)
NEDAP
List of Free Tax Preparation Sites in New York City
The Woodstock Institute
Payday, Auto Title and Refund Anticipation Loans
Studies, reports, and more data about refund anticipation loans
AFFIL Partners
CRA-NC
The High Cost of Refund Anticipation Loans in North Carolina
Center for Responsible Lending
RALs Reports and Papers
Consumer Federation of America
One Step Forward and One Step Back: Analysis of Efforts Against High Priced Refund Anticipation Loans
Testimony of Jean Ann Fox: “Financial Services Issues: A Consumer’s Perspective”
Consumers Union
Letter to Governor Arnold Schwarzenegger
National Consumer Law Center
Tax Preparers Take a Bite Out of Refunds: Mystery shopper test exposes refund anticipation loan abuses in Durham and Philadelphia
RAL Reports, Analysis, Background Information, and Policy Platform
NEDAP
Analysis of Tax Refund Anticipation Lending in NYC 2002 - 2005
The Woodstock Institute
Payday, Auto Title and Refund Anticipation Loans
Other Organizations
Children’s Defense Fund
How You Can Help Working Families: Recommendations to Address Costly Tax Preparation