The Dangers Of Income Tax Refund Anticipation Loans

by Hank Coleman

Income Tax Refund Anticipation LoansIncome tax refund anticipation loans are not a good deal for consumers. In fact, they are down right crummy and can cost you hundreds of dollars. Unless you are in dire need of funds right away for a legitimate emergency, you are better off being patient and waiting for your income tax refund to come to you through direct deposit or even the mail instead of getting an income tax refund loan.

What Is an Income Tax Refund Loan?

When you complete your income tax return this year, you may be asked if you want your income tax refund right away instead of waiting for the electronic deposit to be deposited in your bank account or a check to be mailed to you. For many reasons, many tax payers choose the quick score of cash right away despite paying high fees and interest on money that is really their’s from day one.

So, when you receive income tax refund anticipation loans also known simply as a RALs, the taxpayer receives money up front from the company or person who was their tax preparer. The tax preparer lends the taxpayer the amount of money that they will receive for their income tax refund. But, of course, you will receive the amount of your income tax refund after interest and fees for the loan is subtracted.

So, for example, if you anticipate that you will receive the national average of a $3,000 income tax refund this year and take an income tax refund loan, you may only receive $2,700 after interest and fees are calculated. While this may seem like a drop in the bucket when you are set to receive almost $3,000, it actually equates into a very high interest rate since you are only technically borrowing the money for a few weeks at the most.

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So, after taking an income tax refund anticipation loan from your tax preparer, the federal or state government will deposit your refund with the company that made you the loan instead of sending you the money.

So, while you only received $2,700 from the loan, the lender of the income tax refund loan will receive the full $3,000 from the government you were originally owed as your income tax refund. There is also a chance that your income tax refund will not be the same amount that the tax preparer anticipated. If your income tax refund is smaller than what was originally anticipated, the taxpayer will still owe the balance of the loan to the lender which will still need to be repaid.

Why Are Income Tax Refund Anticipation Loans So Popular?

There are several reasons that income tax refund anticipation loans are so popular in America. One reason is that people are impatient. We want our money now! We don’t want to wait. But, how many of us remember when electronic filing of our income tax returns was not even an option. I can remember my mom waiting and checking the mailbox religiously every day in the spring waiting for her income tax refund check to arrive.

Now, it is so much easier to receive your income tax refund electronically in your bank account. That, of course, assumes that you have a checking or savings account. This is another reason that so many people do not receive their income tax refund electronically and opt for income tax refund anticipation loans. Income tax refund anticipation loans are deposited into the lenders (tax preparers) bank accounts, and the lenders provide the taxpayers with prepaid debit cards that they can spend like cash right away.

Why Income Tax Refund Anticipation Loans Are Bad For Your Wallet

As I mentioned before in the example above, income tax refund anticipation loans are relatively expensive. While it may not seem like you are paying a lot of money in fees and interest on your loan, it is actually akin to payday loans and checking account bounced check charges when you consider how much interest that you are being charged for such a short amount of time.

For the cost of almost 10% in many cases with income tax refund anticipation loans, you are paying for the privilege of receiving your money about ten days before you would normally receive it had you filed for an electronic refund with e-file from the federal government and your state.

To put the interest rate into an annual percentage, paying 10% for just 10 days is the equivalent to over 200% APR on a loan when it is annualize. No one in their right mind would agree to a loan that charged 200% annually, but that is essentially what we are doing when we accept income tax refund anticipation loans.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 593 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 9 comments… read them below or add one }

John S @ Frugal Rules

Good post. I got a RAL years and years ago when the fees were not as bad, but there was still the risk of the return having problems with it and me possibly losing money. That said, I would never do it again. There are too many fees and risks. Plus, if you E-File, often times you can get your refund back in 7-10 business days.

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Ruser S

I’m surprised these are still popular considering, as you mentioned, how quickly a person can get their refund deposited directly into their savings or checking.

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Hank Coleman

One of the most popular selling point of Income Tax Refund Anticipation Loans (RALs) is that you do not need a bank account. It is perfect for people who do not have bank accounts of course. But, for many, it is so simple to get a bank account. These RALs simply target people who are struggling with their finances, etc.

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AverageJoe

Fantastic advice, as always, Hank. People need to realize the consequences of always reacting to that “gotta have it now!” muscle. There are easily better ways.

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Hank Coleman

We fall victim of that “got to have it now” muscle for a lot of things. It isn’t just confined to this loans of course. That impulsiveness can be one of the leading causes to our financial problems.

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Grayson @ Debt Roundup

Great post Hank. I have never like these type of loans and they just leave a bad taste in my mouth when I hear about them. People are so impatient and when they hear that they can walk out with money, they will most likely go for it. Americans always want it now!

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Hank Coleman

That is definitely the biggest draw when you can walk out of the office with money or a Visa gift card in your hand.

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Tie the Money Knot

Nice post. Not a fan at all of these types of loans, and don’t think we ever want to be in a position where we just can’t wait to get a refund in hand. Or, more accurately, where we NEED to get that refund in hand. Best not to find ourselves in that position!

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Hank Coleman

Yes, having a fully funded emergency fund would negate the need to have to take these types of loans with their large fees and horrible interest rate.

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