CONSUMER ADVISORY

March  2006                              By Attorney General Tom Miller

 

 

Rapid Tax-Refund Loans

A very costly way to gain just a few days on tax refunds

 

            It’s tax season, and tax preparers may invite you to get a “Refund Anticipation Loan” or “RAL” – a loan borrowed against the expected tax refund.  Such a loan may come a few days faster than the refund – but you pay extremely high fees to borrow your own money.

 

            Remember, a “Refund Anticipation Loan” is just that – a very short-term loan, secured by your expected tax refund, arranged by a tax preparer through a bank.  You pay finance charges (and, most often, tax-preparation charges as well.)  The loan is repaid when the IRS sends your full refund to the bank.

 

            Refund anticipation loans are expensive.  According to a report this year by the Consumer Federation of America and the National Consumer Law Center, the loans cost about $29 to $120, depending on the size of the refund.  That means the interest rate on “RAL” loans could range from about 40% to over 700% APR (annual percentage rate of interest.)  That’s a bad bargain for an “advance” of just 7 to10 days.

 

            Consumers need to ask tough questions:

           

·        “How much will I pay for the loan?”  An average refund is about $2150, with a typical finance charge of $100 for a refund anticipation loan -- a 178% APR.  Fees for tax preparation, electronic filing, or check-cashing can double or triple that cost.

 

·        “What does the fee buy me?”  An RAL loan gets your refund to you in 1-4 days, compared to just 7-10 days if by ordinary electronic refund deposit to your bank.