“Get your tax refund fast” sounds like the best sentence you could hear that still has the word “tax” in it, but don’t take the marketing bait. You’re better off waiting for your IRS refund check than taking out a potentially costly refund anticipation loan.
What Is a Refund Anticipation Loan?
A refund anticipation loan often called a RAL, or a refund anticipation check (RAC), or “instant refund offer,” is a short-term loan against the refund a taxpayer expects to receive. In anticipation of you getting your tax refund, a lender will give you an advance via a short-term loan of the amount of money you are expected to get back from the IRS (minus any applicable interest and fees). When your official refund check is ready, the amount goes directly to the lender to repay the loan.
These days, major tax preparation businesses often offer refund anticipation loans. The representative who helped you may present the loan as a chance to get your refund in a few days, instead of weeks or months. RALs are a source of additional income and are heavily marketed.
As you may expect, RALs are most appealing to people who want or need their tax refund money now, either to pay urgent bills or debts or buy something they’ve been anxiously waiting for. People who plan to sock away their refund in a savings account (or splurge on a vacation or other luxury) can typically afford more time to wait for the payment to come directly from the IRS. RALs have earned a reputation for inflated fees and rates that take advantage of the people who need their refund dollars the most.
How RALs Cost Taxpayers
Getting money early, especially when you know the IRS is putting a check in the mail, sounds like a good thing. But let’s take a closer look at the often-missed details about refund anticipation loans.
First off, until the IRS has finalized their review of your tax forms, you don’t know for certain how much of a tax refund you’ll get. Mistakes can happen. Federal and state agencies can garnish your tax refund if you have outstanding debts, like unpaid mandated child support or Stafford loan payments. Most RALs are based on your anticipated refund, not the actual amounts and once you’ve borrowed the money, a loan is a loan. You have to pay back the entire amount you borrowed, even if your actual refund is lower than you expected.
RAL lenders offer the immediate gratification of getting money into your account sooner. The problem is, that speed often comes with a hefty price tag. Filing fees, application fees, and check cashing fees can add up quickly. Some RALs can also carry high-interest rates, with APRs often hitting triple digits. Wisconsin’s Department of Revenue warns that RAL costs could eat away 10% of your total tax refund.
Regulatory crackdowns between 2010 and 2012 eliminated some predatory RAL practices, in particular, high-interest rates on loans offered by banks. But non-bank lenders may find a loophole to continue charging excessive interest and fees.
The Problem With “Interest-Free” Loans
Companies promoting “0% interest, no fee” RALs appear at first to have a worthwhile offer, but there may still be a catch as tax preparation services can range from zero to hundreds of dollars, depending on the difficulty of the return. After all, what incentive does a corporation have to put money in your pocket? A New York Times article pointed out that the rising popularity of cheap or free e-filing options meant fewer customers sought out tax preparation services that cost hundreds of dollars.
Fee-free RALs and similar refund advances are basically a marketing expense to get you in the door. Companies don’t mind breaking even or even losing some money processing loan application fees because they’ll sell you other services. The National Consumer Law Center reports that tax preparation services lack transparency and “often refuse to provide firm price quotes ahead of time.” It’s nearly impossible for a consumer to tell whether the company makes up RAL fees by padding or adding other costs. Some companies also provide the refund advance amount on a prepaid debit card, which can have associated fees for certain transactions. Offering customers a card opens an easy avenue for the company to promote other services, loans, or lines of credit.
The same 2017 New York Times article quoted H&R Block’s chief executive, Bill Cobb, as saying, “We are looking to do a lot of loans to a lot of people, and we will be marketing this aggressively.”
It’s not only tax preparation companies that use RALs as a marketing tool. Did you see an offer to get your return prepared at an unusual location, like a car dealership or furniture store? Yes, these and other businesses may offer tax preparation services during tax season. RALs or RACs aren’t difficult to find around tax filing time. A car dealership or furniture store might see offering a RAL as one way to entice customers to put a down payment on a car or household furnishings, by making the dollar amount of an expected refund available now.
The bottom line: Companies don’t offer refund advances out of pure good-heartedness. They’re hoping to sell you something at some point, and a free loan can be their best option to do that.
How to Get Your Refund Fast
Companies providing RALs are typically eager to offer them to any qualifying customer. Low-income and moderate-income taxpayers may have a harder time saying no, even if they want to avoid interest and fees if they see a loan as their best option to access tax refund funds they need right away. Before you resort to a loan that disadvantages you, try these options to get your tax refund as soon as possible, without involving lenders:
- Make sure you have a bank account that supports direct deposit. Electronic deposit options can drastically reduce the amount of time it takes for the IRS to process your file and release your refund, which could be just a few weeks. In addition, check cashing services charge fees. Many banks and credit unions have free account options, and they’ll set you up at no charge.
- Submit your taxes via e-file and request a direct electronic deposit. With paper returns, it can take 12 weeks before the IRS processes your file and sends you a check. With electronic filing, the IRS estimates a 21-day turnaround to send refunds.
- Get trained assistance on your taxes for free. Trained volunteers in Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs help low-to-moderate-income and senior taxpayers complete their tax returns, for free. Visit the IRS VITA Locator tool or call 800-906-9887 to learn more, and to find a local VITA center near you.
- Go to your local public library or community center. Staff may be able to provide contact information for local VITA and TCE centers or have computers you can use for free.