There is not a day that goes by where I don’t see someone in a crazy costume or lady liberty waving and spinning a big arrow pointing to the local tax center. If I manage to read the sign while I whiz by at 45 miles per hour, it is usually advertising their tax refund anticipation loan. These loans are not a great product, and you should avoid them at all costs.
What Is A Tax Refund Anticipation Loan (RAL)?
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 down side 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 eating 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.
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.
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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 tax payers 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.
Have you ever accepted a tax refund anticipation loan? I’d love to hear your thoughts in the comment section.