Refund-Anticipation Loans: Are They Worth It?

As winter gives way to the next season, that is, tax season, many eager consumers who are expecting tax refunds are drawn to the appeal of refund-anticipation loans (RALs), which offer a way to get refunds back fast – sometimes in as little as 24 hours. Sounds great, but what’s the catch?

Refund-anticipation loans are essentially short-term loans (usually 7-14 days) offered by tax preparers and other lenders. The consumer receives payment in the amount of his anticipated tax refund in exchange for a fee, which is deducted from the loan amount. When the actual refund is issued by the IRS it goes directly to the tax preparer or loan provider. The downside is that the annual interest rates on these loans are exorbitant — between 36%-500%. So between the loan fee, tax preparation fees and other administrative fees imposed on the loan, consumers end up losing a sizable chunk of their refunds. As an example, for a typical refund of $2500 a consumer could pay between $57-$111 in loan fees for an RAL, plus $150 for tax preparation and a $40 administrative fee. Worse yet, if the refund is denied or if the refund amount is less than anticipated, the customer still has to repay the loan, and any delay or failure to do so could damage the consumer’s credit.

Nevertheless, these loans continue to be very popular. According to the National Consumer Law Center and Consumer Federation of America, an estimated 9.6 million American taxpayers got refund anticipation loans in 2005 – that’s 1 in 13 tax returns. Most of the recipients were from low-income households that qualified for the Earned Income Tax Credit — in other words, people who could least afford to pay excessive and unnecessary interest and fees.

The good news is that with today’s tax filing options, there’s really no reason to pay the high price for a refund-anticipation loan. The IRS, through its partners, offers free electronic filing to anyone whose 2006 adjusted gross income was $52,000 or less. And if you take advantage of the direct deposit option, you can get your refund back in less than two weeks. For more information, visit www.irs.gov.