Beware of the Refund Anticipation Loan!

by Silicon Valley Blogger on 2010-03-0113

Why fast cash loans are evil.

There are many of you that can’t wait to file your taxes each year because you are expecting a decent refund. Unfortunately, it’s only too often that families in need of some fast cash will not think through the consequences of getting a refund anticipation loan. And it is precisely that lack of patience which ends up costing people a lot of cash at a time they can’t really afford to waste any money.

Have you heard of a refund anticipation loan? Many people haven’t — and that’s a good thing. In this case, ignorance would be bliss! Here’s a quick definition: refund anticipation loans (or RALs) are short-term loans that tax payers can take against their refund amount. Taxpayers often request this option if they want access to their expected refund amount as quickly as possible, as soon as they’ve filed their returns. They want the money quickly since most regular tax refunds take 6 to 8 weeks to be accessible.

A Waste of Good Money?

In the past, RALs may have made a bit more sense than they do now; these days, we have technology and electronic direct deposits that have made it much easier to receive our refunds promptly and which have taken the place of paper checks in the mail. However, people in need often don’t think past the fact that they need cash right now. They neglect to consider the true cost of what taking such a loan involves. Some lenders will charge anywhere from 30% to 200% in interest. Highway robbery! Taxpayers end up losing a big chunk of their money just to get cash a week or two faster than they would with direct deposit. I really doubt that people would fall for such loans if they truly understood what they are signing up for with RALs. Failing to read the entire contract of the loan is what leads to the costly loss of cash, and the reality only hits when the refund comes back smaller than anticipated.

refund anticipation loan


RAL loans are still popular but there is an increase in the negative press surrounding them. Consumers are being warned to read the fine print and the IRS is becoming more vigilant about how the loans are marketed to taxpayers. New guidelines are being sent to tax preparation services and companies that outline responsibility to their clients. It will still take some time for the government to stabilize the tax industry with regards to ethics, so consumers considering a refund anticipation loan need to take it upon themselves to ensure that they are not getting ripped off.

Alternative Choices

Taxpayers expecting a refund who are in need of fast cash do have other options outside of the loan arena. For instance, filing online through electronic forms will return a refund faster than traditional paper methods, especially if you do a direct deposit to your bank account. Also, in preparation for the next tax season, taxpayers who traditionally get a large refund back each year should amend their tax withholdings to get more money back through their regular paychecks instead of through a lump sum refund.

Know Your Tax Preparation Company

If your tax preparation company heavily pushes refund anticipation loans, you may want to rethink your plans. While not all companies are looking to take advantage of your need for cash, many new preparation services and agencies spring up around the nation to do just that. For those who are really in need, my suggestion is that you inquire about those different options for getting refunds faster that don’t involve loans. If you do need to take a loan to access your refund quickly, you should first read your RAL contract thoroughly and be sure that you are clear on how much it actually costs you to rush a refund. A tax company representative should be willing to explain exactly what your contract states and should allow you time to decide if you can really afford the potential high cost of a refund anticipation loan. If you are looking for a new service to do your taxes, stick with reputable companies that have good reviews from the Better Business Bureau.

This guest post is by Arjun Rudra, who writes for InvestingThesis.com (Investing Thesis: Credits Towards Financial Freedom). .

Copyright © 2010 The Digerati Life. All Rights Reserved.

{ 12 comments… read them below or add one }

Manshu March 2, 2010 at 4:33 am

I hadn’t heard of this thing of probably good (as you say). An electronic refund comes in really quick so people needing quick cash should really be thinking about that instead of an anticipation loan. Love the name though.

basicmoneytips March 2, 2010 at 4:34 am

I agree, these RALs are the worst. Its hard to imagine with electronic filing why people would get talked into these things.

I think there are still a surprisingly lot of people who are not internet savvy and still fall prey to these scams.

Kosmo @ The Casual Observer March 2, 2010 at 6:52 am

You hit the nail on the head – if they need the money that bad, adjust withholding.

We got our federal and state refunds very quickly this year (E-file & direct deposit). I forget the exact turnaround, but we were quite surprised – seems like it was a bit quicker than in years past.

Silicon Valley Blogger March 2, 2010 at 8:14 am

RALs (or tax refund loans) are a lot like payday loans. If you’re going to apply for one, you better know WHY you’re doing it and how much it’s going to cost you. The problem is that a lot of people don’t realize just how big a bite these things take out of their money. Paying 30% or more in interest to get your refund an extra week or two earlier just does not make sense. Who falls for this stuff? But apparently, this produces a lot of revenue for lenders and some tax preparers.

Jamel Rose March 2, 2010 at 4:39 pm

I’m personally very grateful for informative truths that stem from columns like this one. Often times, ignorance plays a key role in the ability to formulate better consumer practices. This makes us easy targets and we owe it to ourselves to be more informed about the things that affect us all.

Credit Girl March 3, 2010 at 2:28 pm

I never even heard of this but I guess you’re right- ignorance is bliss in this case. I hope I’ll never have to utilize this option either… 30% interest sounds like too much for me!

Nerd Mom March 3, 2010 at 10:49 pm

Regarding the tax refunds topic: If you don’t receive tax refunds, then you deserve congratulations! Especially if it is a result of a savvy tax payment strategy.

I personally think that it makes sense to take advantage of the IRS safe harbor rules for avoiding tax penalties: 90% of the current year’s tax liablility or 100% (or 110%) of the previous years’ tax liability (see fairmark.com/estimate/howmuch.htm).

Any amount in owed taxes above the safe harbor could, of course, be invested and paid to IRS
on April 15 of the following year. It’s completely legal, and more profitable than receiving a tax refund.

Robert March 4, 2010 at 9:54 am

My dad looked into getting one of these a few years back, and it works like this: The tax place completes your tax return, anticipates how much you will receive and then cuts you a loan for that amount. When your tax refund comes back, the money will go to them. However, the loan comes with a few strings attached, the most important of which is a huge fee for doing so — to the tune of $150 or more. If you’re really, really hard up for cash, it’s probably worth it, but otherwise just wait a few weeks (about 8 business days for me since I e-filed) and spare yourself the fee. After all, you should be putting that money in your savings, right ;-)

Great post SV blogger.

Jeremy Slade April 9, 2010 at 11:00 am

The tax system is set up so you don’t feel the pain of the taxes you pay. Giving the government an interest-free loan of *your* money feels good?

I’d much rather have zero withholding, and pay taxes in one lump, so that it HURTS! That would be the right motivation for everyone to care about how are taxes are spent. I wouldn’t mind earning interest on that money during the year, either.

Silicon Valley Blogger April 9, 2010 at 12:01 pm

Let’s talk about refunds for a moment. Interest free these days doesn’t mean as much as it used to be. Yes, it’s a quick and dirty reaction to a tax refund, but in a strange way, I find it psychologically uplifting. Seems illogical for sure, but hey, a “windfall” is a mood booster no matter where it comes from.

Lately, we received a tax refund rather than have to pay as we usually do. I guess it was just a change for us to have this happen after 20 or so years of having to pay out large tax bills and having to see our account dwindle by that much. So it was a pleasant surprise, even though yes, it was due to some miscalculations we made on our estimated taxes. To be honest, our taxes are extremely complicated (even our tax guy complains), so I wouldn’t fault ourselves for erring on the side of conservative accounting.

By the way, if I had to pay all my taxes in one lump, we’d get penalties (not worth the interest we’d earn sitting on the government’s money). The way we used to pay taxes, we’d be in trouble if we didn’t have withholding. Way back when, even with 0 deductions taken, we still owed.

Baker @ ManVsDebt April 10, 2010 at 11:02 am

To everyone who’s getting back a return this year, congrats! I went in thinking I was going to owe taxes, however I grossly underestimated the tax benefits of our first child (born in 2008). We also are getting back a hefty refund. The feeling is awesome when you’ve been used to paying!

Michelle May 11, 2010 at 12:17 am

Well, I am definitely one of the few who haven’t heard about the RALs, and I suppose that was good. 30% to 200% is just INSANE! Anybody who needs cash should only think about this if this was a matter of life and death, but if they could keep their hands away from it, they better do. There are plenty of better options out there that are way worth the paperwork than getting yourself into a situation where you don’t win at all.

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