Income tax refund anticipation loans are not a good deal for consumers. In fact, they are downright 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?
A tax refund anticipation loans is a program offered by many of the nation’s largest tax filing companies. The program allows taxpayers to get their tax refund from the filing company immediately that day instead of having to wait for the IRS to issue a check or provide a direct deposit which can take eight days or more to arrive in your bank account. The tax filing company pays you the tax refund anticipation loan, and then they keep your income tax refund when it finally comes in from the IRS.
The downside to tax refund anticipation loans is that there are typically large fees that you have to pay in order to get your tax refund right then on the spot. In most cases, the fees can run as high as 24% or more significantly eat into the amount of income tax refund you ultimately receive. Many tax preparation companies also put a low cap of $1,500 on the amount of loan you can receive.
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 taxpayers 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.
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 annualized. 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.
Tax Refund Anticipation Loans Have High Fees
Like payday lenders, tax refund anticipation loans provided by the national tax preparation companies in America come with high fees. And, to make matters worse, you are paying fees and interest in order to get access to your own money just quicker than you normally would be able to do so.
According to a study from the Consumer Federation of America, over seven million Americans pay over $600 million for the privilege of receiving their income tax refund a few weeks earlier than the time it takes to mail the check. While a 24% interest rate seems eye-popping when you first look at the figure, it is not the entire story.
Like payday loans, that interest rate is not annualized like we are all used to looking when we see 4.5% APR on a car loan or 18% APR on a credit card. Instead, that 24% interest on your tax refund anticipation loan is but a small segment in time, a few weeks at the most. If you were to annualize that tax refund anticipation loan, you could be looking at an average 169% APR.
You Can Get Your Tax Refund Fast Yourself
Even the US Internal Revenue Service (IRS) recommends that consumers stay away from tax refund anticipation loans in favor of e-filing options. With filing your tax return electronically to the IRS, you can receive your income tax refund in as little as eight days.
Prepare, print and e-file your simple return with TurboTax® Federal Free Edition and get your maximum refund this year. Many proponents of tax refund anticipation loans say that it is an option for those taxpayers who do not have a checking account in their name. With a little prior planning, it is too easy to open a free checking account with little or no deposit required.
Tax refund anticipation loans are often criticized because they tend to prey on low-income families. This is especially a problem for US citizens who do not have a bank account and cannot take advantage of the e-filing options. It is estimated that almost 25% of all taxpayers do not even have a checking account. With a little bit of prior planning, there are other options that you can take in order to avoid a tax refund anticipation loan.
What Can You Do Instead
- Here are a few ways that you can avoid the high costs of an income tax refund anticipation loan (RAL)
- File your refund electronically
- Get your refund fast: E-file with TurboTax today for your fastest refund possible!
- Request direct deposit — It typically takes 10 business days to process and electronically deposit a refund
- Open a bank account for an electronic deposit income tax refund like ING DIRECT Checking Account. Open online now.
- Get personalized tax advice for your unique situation at TurboTax® so you know you are getting all the deductions you deserve.
- Get a free tax preparation help from your state