It’s tax season, and many people look at tax refunds as an easy way to get some “free” money. The truth is, your tax refund isn’t really free money. It was yours to begin with. You just gave too much to Uncle Sam and he was nice enough to hold it for you in an interest bearing account where it would earn interest… for the government.
So now it’s time to get your money back. Once upon a time, people had to wait until the IRS sent the refund check to you. That could take up to 2 months or more. But now, in the age of electronic filing and funds transfers, people can receive their refund in a matter of days. Unfortunately, some people aren’t satisfied with mere days. They want it now! Enter the Refund Anticipation Loan (RAL).
Refund Anticipation Loans are a bad deal for consumers
The Refund Anticipation Loan is quite possibly one of the worst things to happen to taxes since… well, taxes. Seriously, RALs are awful. Tax companies offer people inflated loans through a third party bank (sometimes affiliated with the tax company). These loans are secured by the tax return they just filed on your behalf, and your tax return is automatically deposited to the lending bank to repay your Refund Anticipation Loan.
Of course, the tax companies will charge you a pretty penny to take advantage of this “convenience.” Associated charges and fees normally include loan application charges, finance charges, a fee to have the payment issued to you in a check vs. electronically, rush charges, and possibly additional fees.
Refund Anticipation Loans are not much faster than direct deposit. On top of this, some tax preparation companies will not even guarantee you will receive your money within a certain time frame. They often claim they can can get you that loan in 1-2 days, whereas the quickest you would receive it from the IRS is roughly 1-2 weeks. Another “benefit” they tout is that there are no upfront fees. Tax filers can have their tax preparation bill deducted along with their associated RAL fees, which is repaid directly to the lending bank.
How much do they cost? A lot! H&R Block publishes their RAL price list. It can cost well over $50 to get a RAL on a $200 tax return. In some cases, the cost of a RAL is well over $100. Jackson Hewitt has a Refund Anticipation Loan page and a Money now Loan page, but neither lists the cost of the service. My guess is that it is much easier to confuse people by springing it on them at the last minute.
Refund Anticipation Loans are essentially payday loans that are guaranteed by your tax refund. Tax refund companies prey on tax filers’ ignorance about the product, or their need (or greed) for the money quickly. The best thing to do is avoid Refund Anticipation Loans completely, or you just might get raked over the coals.