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Is Getting A Tax Refund Anticipation Loan a Good Idea?
Only if you enjoy paying a super-high price to borrow money that already belongs
to you! Sounds like a ridiculous idea, right? But that’s pretty much what happens
to many folks at tax time in the crazy world of RAL’s or refund anticipation loans.
You may be tempted by tax-time advertisements for “Easy Cash Refunds”, Express
Money” or “Instant Refunds”. These ads will offer to get you your refund in just
a day or two, or even on the spot. Beware! Many of these “fast refunds” are really
loans, refund anticipation loans.
When you get a RAL, you’re borrowing against your own tax refund money. And RAL’s are
often marketed to people who need money the most—low to moderate income workers who
received the Earned Income Tax Credit.
Don’t Pay Triple-Digit Interest Rate to Borrow Your Own Refund
RAL’s are extremely expensive. Loans typically range from $30 to $90, which translates into Annual Percentage Rates
(APR’s) of about 60% to over 700%. If you paid those rates on all your borrowing you’d probably
go broke! And all to get your tax refund just a few days earlier than you can for free from the
IRS. You’re lining someone else’s pockets with YOUR hard earned money!
RAL’s Can Be Hazardous to Your Financial Health
RAL fees, combined with tax preparation, electronic filing and other fees, can end up eating away a big chunk of your refund.
In addition to their high costs, RAL’s can be risky. Since RAL is a loan from a bank in partnership with a tax preparer, it
must be repaid even if the IRS denies or delays your refund, or your refund is smaller
than expected. If you don’t pay back the RAL, the lender will take actions to hurt your
credit rating and send your account to a debt collector. In addition, when you apply for
a RAL, you are giving the lender the right to grab your tax refund to pay for old tax loan
debts that the lender claims you owe.
What are the big rocks in your life? A project that YOU want to accomplish? Time with your loved ones?
Your faith, your education, your finances? A cause? Teaching or mentoring others? Remember
to put these BIG ROCKS in first or you'll never get them in at all.
Example:
For a tax refund of $2000, you might pay to get a RAL
RAL loan fee: $75
Electronic filing fee: $40
Combine with the fee that you will need to pay the tax preparer: $100
Total $215
This is over 10% of your refund! The RAL has an APR of 142% if it beats the IRS by ten days.
Save Dollars and Avoid RALs: Use a VITA Site
A great way to save money at tax time is to go to a Volunteer Income Tax Assistance site.
VITA provides free tax-preparation to low-to-moderate-income taxpayers. VITA sites are
sponsored by the IRS and can be found in libraries, community centers and other locations
during tax time.
For the nearest VITA site call the IRS general help line at 1-800-TAX-1040 or go to
www.taxcoalition.org.
Ways to Save At Tax Time
Here are ways to take a pass on that RAL and save money at tax time.
E-File with Direct Deposit. File your tax return electronically
(E-file) to speed up your refund. Tell the IRS to deposit the refund into your bank
account—you provide the account number right on your tax return. You can get a refund
in about ten days this way—without paying one cent extra for a loan. Some of the tax
preparation programs (VITA sites) can file electronically. If you have internet access
you may be able to get free tax preparation and electronic filing at www.icanfile.org.
Get a Bank Account. If you don’t have a bank account, open one up to take
advantage of direct deposit. You can use a savings account to receive your tax refund and
maybe even save some money for a down payment on a house or a car or build an emergency fund.
Wait Just a Bit Longer. Do you really have to get cash from your tax refund today?
Can you wait a few weeks to save almost $100? If you have an urgent bill to pay, ask for more
time until the tax refund check comes from the IRS. Don’t take on a new expensive debt to pay an
old one.
Avoid Check Cashers. Check cashers charge an extra fee to cash RAL and tax refund checks.
Some check cashers charge up to 7% to cash a RAL check—the average is about 3%.
So if you receive a $2,000 refund, it would cost you an average of $60 to cash the
RAL check—on top of the RAL and tax preparation fees. A smarter move is to use a bank account.
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