Avoid Tax Refund Anticipation Loans

If you need your tax refund fast, a tax refund anticipation loan (RAL) is usually not a good idea.

Although getting your tax refund fast is often a good way to get quick cash, you should probably avoid a refund anticipation loan (RAL). Here’s why.

(Learn about other options to avoid when you need cash fast.)

What Is a Tax Refund Anticipation Loan?

A tax refund anticipate loan is a loan offered through a tax preparation company for the short period between the date when the taxpayer receives it and the date when the IRS repays it by depositing the taxpayer’s refund into the lender’s account (usually only a week or two). The amount of the loan is the amount of your anticipated refund minus the loan fees and the tax preparation fee.

Downsides and Risks to RALs

The loan fees and tax preparation fees for RALs can be quite high.

RALs can be very expensive. The interest on these loans can be the equivalent of an annual percentage rate (APR) of 70% or more. On a refund of about $3,300, you might pay over $300 for tax preparation services and loan fees for just a one or two-week loan. Fortunately, federal agencies have stopped banks from making these predatory loans. But tax preparation companies are starting to partner with non-bank financial companies to make the same kinds of loans, which may end up being even worse than the former RALs.

In addition to being extremely expensive, RALs also pose some risks. You must repay the loan even if your refund is denied, is less than expected, or is frozen. If you can’t repay the loan, the lender may assign the debt to a collection agency. The unpaid debt will appear on your credit report. And, if you apply for an RAL again next year, the lender may take that refund to pay this year’s unpaid RAL debt, even if you use a different lender or tax preparer.

Other Ways to Get Your Tax Refund Fast

It is far better to be patient and wait for your refund, rather than pay the high fee for a tax refund anticipation loan. In most cases, you can file your return electronically and get the money within a week or two at most (by having the refund deposited directly into your bank account, for example). Or you can adjust your withholding so that you get the money during the year instead of at the end of the year as a refund.

This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.

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