What Happened to Refund Anticipation Loans (RALs)?

Find out why Tax RALs have become a thing of the past.

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Back in the old days--2012 and earlier--many large tax preparers offered their clients refund anticipation loans (RALs). These are one or two week loans that are secured by a taxpayer's anticipated tax refund. You may have noticed that you don't hear much about these anymore. What happened?

To put it simply, RALs are a rip-off. The interest rates charged on these loans could rival what a loan shark would charge, with annual percentage rates in the triple digits. The cost for a typical RAL for a loan of $1,500 is about $60--this translates into an annual percentage rate of 149%! To make matters even worse, RALs have historically been targets of the working poor, particularly those who receive the Earned Income Tax Credit, a refundable credit designed to put extra money in the pockets of the poor, including those who owe no taxes.

After years of complaints and lawsuits by consumer groups and others, the FDIC (the federal agency that insures banks) cracked down on banks that provide tax preparers with the money to make RALs. All of the main banks involved in the practice agreed to stop making RALs after April 2012. Thus, the wide spread sale of RALs by tax preparers is over. Only a few tax smaller tax preparers continue to offer RALS that are funded by fringe lenders.

Nevertheless, while RALs are a thing of the past, some tax preparers continue to find ways to overcharge their clients. For example, some tax preparers and banks continue to offer refund anticipation checks (RACs). RACs are similar to RALs, but not quite as bad. They are technically not loans and no interest is charged on them. When a taxpayer buys a RAC, he or she is not required to pay the tax preparation fee up-front. Instead, the bank opens a temporary bank account into which the IRS direct deposits the taxpayer's refund check. After the refund is deposited, the bank issues the taxpayer a paper check or prepaid debit card with the RAC proceeds minus the tax preparation fee and closes the temporary account.

If a taxpayer has a bank account, a RAC does not provide a faster refund. The only reason to get a RAC is to delay payment of tax preparation fees by having them deducted from the refund. However, add-on fees are usually charged for RACs--$35 or more--a hefty charge for what is essentially a one-time use bank account.

March 2013

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