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A Refund Anticipation Loan (RAL) is a loan made by a lender that is based on and usually repaid by an anticipated federal income tax refund. They are offered starting in January through the end of the tax season in April.
Taxpayers are generally charged fees and interest to obtain a RAL. Just like any other loan, the full amount of the RAL must be repaid even if the refund is lower than the amount anticipated.
Hate to wait for your tax refund? There are ways to get that refund before the IRS processes your return and sends your money. However, you need to be sure that you’re not using an expensive “loan,” and there are typically limits on how much you can receive.
In the past, refund anticipation loans were expensive similar to payday loans. Those loans may still be out there, although the major tax preparation services have moved away from them.
A Refund Anticipation Loan (RAL) is a loan that is offered by many tax preparation companies to people against their income tax return. A tax refund anticipation loan can be approved in a manner of minutes and the money accessible within a day or two. These loans are based on the full amount of the tax refund. Loans can be had for the entire amount or a partial amount of the anticipated refund. When the check arrives at the tax preparer’s office, the loan is paid in full, with interest, and any remaining balance is issued to the recipient. Many people use this program for its quick access to money without considering the high interest rates attached.
While there are no credit checks to receive these loans in the conventional manner, loan prepares must request information from the IRS to see if there are any liens against the refund. Liens may be placed against the refund for back taxes, past due student loans and back child support. If a lien is against the refund a refund anticipation loan may be denied or only given for the balance of the refund.
Better Tax Refund Options
Electronically filing your taxes can provide you with a refund in as little as two weeks. If you have a bank account you can have the money automatically deposited in even a shorter period of time.
The need for these loans is no longer necessary. Consumers wishing to receive their money faster than two weeks may wish to consider a different financial option to avoid these high interest rates.
If you do not have a bank account you may consider purchasing a pre paid debit card. Most of these cards can also act as a bank account and can receive electronic deposits. Apply for a card that has routing numbersavailable and you will benefit from the same expediency in receiving your refund. These online banks are very useful for people that have had credit issues in the past. Once the money has been sent to your card you can access it immediately.
Traditional Refund Anticipation Loans
Traditional tax refund loans are less consumer-friendly than today’s refund advances. However, you may still see offers for those types of loans, so it’s important to understand how they work. Those loans are typically financed by small finance companies not major banks working with household-name tax preparation services.
With the older version of loans, you’d get approved based on the expectation of a loan coming from the IRS. Your tax preparer might provide a prepaid card with funds loaded onto it, a paper check, or an electronic deposit to your bank account.
Once the IRS processes your return, the refund goes directly to your lender.
The loan gets paid off, and you’re done.
How does the Refund Anticipation Loans process work?
When a taxpayer receives a RAL, the tax preparer lends the taxpayer the amount of their tax refund less the cost of interest and fees for the loan. When the government sends the actual refund check, it is directly deposited into the bank that made the loan. If the refund is smaller than anticipated due to deductions for items like unpaid child support or traffic tickets, the full amount of the loan must still be repaid.
How much does a Refund Anticipation Loans cost?
The cost of a RAL can vary widely and consumers should understand all the costs associated with this type of loan. RAL’s often carry extremely high interest rates. In addition, there are often other charges like electronic filing fees, application fees and a fee to cash the loan check. When all the costs of an RAL are added up, taxpayers can be spending more than 10% of their refund just to get the money a few days sooner.
Be sure to read the fine print and ask a lot of questions before signing up for a RAL. Remember that most taxpayers who file electronically receive their refunds in less than 10 days. Paying the costs associated with a RAL could be a large price to pay for getting your money a few days quicker.
