Tax Refund Anticipation Loans

Why Pay to Borrow Your Own Money?

Texas Taxpayer Assistance Project
A Project of Texas RioGrande Legal Aid, Inc.

Clients Call Toll-Free 1-888-988-9996

What Is a Refund Anticipation Loan?

A refund anticipation loan, or RAL, is just that – a loan. Why would you pay a super-high price to borrow money that already belongs to you? That sounds ridiculous, doesn’t it? But that’s pretty much what happens when you get a RAL.

You hear and see advertisements for “Fast Cash Refunds,” “Express Money,” or “Instant Refunds.” These ads 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 are borrowing against your own tax refund money. And RALs are often sold to people who need money the most – low and moderate income workers who receive the Earned Income Tax Credit.

How Much Do I Pay For a Refund Anticipation Loan?

RALs are extremely expensive. Loan fees can be anywhere from $30 to $90, which means you are paying Annual Percentage Rates (APRs) of about 60% to over 700%. And this is just to get your tax refund a few days earlier than you can get it for free from the IRS. You’re lining someone else’s pockets with YOUR hard-earned money!

The fees for a RAL, along with tax preparation, electronic filing, and other fees, can end up eating away a huge chunk of your refund.

Example: For a tax refund of $2000, you might pay to get a RAL:

RAL loan fee:                                                                  $ 75

Electronic filing fee:                                                        $ 40

Combined with the fee you pay the tax preparer:     $100

Total:                                                 $215  

This is over 10% of your refund!

This RAL has an APR (Annual Percentage Rate) of 142% if it beats the IRS by 10 days.

RALs Can Be Hazardous to Your Financial Health.

In addition to their high costs, RALs can be risky. A RAL is a loan from a bank in partnership with a tax preparer, and you must pay the loan back to the bank. You must pay it back even if the IRS denies or delays your refund, or your refund is smaller than you thought. If you don’t pay back the RAL, the lender will hurt your credit rating and may send your account to a debt collector. Also, when you apply for a RAL, you give the bank the right to grab your tax refund to pay for old tax loan debts that the lender claims you owe.            

How Can I Save At Tax Time?

You do not have to get a RAL – most people don’t need one – and save money at tax time by doing these things:

ü      E-file with Direct Deposit.  File your tax return electronically (e-file) to speed up your refund. Tell the IRS to deposit the refund directly into your bank account – you provide your account number right on your tax return. You can get a refund in about 10 days this way – without paying one cent extra for a loan. Most of the free tax preparation programs (called “VITA” sites) can e-file your taxes. If you have internet access, you may get free tax preparation and e-filing at www.icanefile.org.

ü      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 save some of it for a downpayment on a house or a car, or to build a nest egg.

ü      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 $100 or more? If you have an urgent bill to pay, ask for more time until the tax refund comes from the IRS. Don’t take on a new expensive debt to pay an old bill.

ü      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, you pay 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.

ü      Use a VITA Site.  You can save money and go to a Volunteer Income Tax Assistance (VITA) site. You can get free tax preparation and free e-file services at a VITA site. 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 1-800-829-1040 or go to www.tax-coalition.org.

For more information or to apply for free legal help with an income tax problem, call the Texas Taxpayer Assistance Project, a project of Texas RioGrande Legal Aid, toll free at 1-888-988-9996.