Why You Should Just Say No to Refund Anticipation Loans

Refund Anticipation Loans

Last year saw the advent of “Gray Thursday” and our Congress’ second full year without a budget. What do both of these very different things have in common? In my opinion, they indicate what I think all of us would agree with – that we live in an “I need it now” society. We don’t like to wait. We want what we want, and we want it now. It’s become an American consumer mantra of sorts. We can’t wait until the day after Thanksgiving to go shopping and our government can’t agree on the most basic of fiscal measures to reign in our spending. This tax season, there’s an option out there that’s become popular for the same reasons that we can’t stay out of Walmart on Thanksgiving. Refund Anticipation Loans offer the promise of a tax return as early as January. They’re popular, but are they a good idea?

What are Refund Anticipation Loans?

In my opinion, and I’m in good company, Refund Anticipation Loans are not a good idea. Before I get to why RALs should be avoided, I’ll cover what they are. It may seem like common sense, especially if you’ve really never heard of Refund Anticipation Loans, but they are loans. They are not instant tax refunds and you don’t have to accept them from professionals who prepare your tax returns, either. RALs are high-cost, short-term loans for consumers that are secured by their expected federal and state tax refunds. They sprang up in the 1980s when the IRS introduced electronic tax filing and have hung around ever since. I suspect that most people who take advantage of Refund Anticipation Loans don’t fully understand what they are or how they work.

Why They Aren’t Worth the Fees

When you agree to a RAL, whoever prepares your taxes lends you the amount of your tax refund less interest and fees, which are usually at least $50, for the loan. Just how much you pay in fees and interest depends on who you go with but many people end up giving up 10% of their refund for the convenience and immediacy of a Refund Anticipation Loan. So if you are due a $1,500 refund from the government, you may end up receiving only $1,350. That may not seem like much but I can think of a lot of better things to do with $150 (like go out on a few date nights or buy a few weeks worth of groceries) than give it to a glorified loan shark.

Like Payday Loans, RALs are Risky and Indicate Poor Planning

Refund Anticipation Loans are for taxes what payday loans are for paychecks. Payday loans carry a risk of falling into a vicious debt cycle that never allows you to receive your full paycheck and RALs carry a risk of never allowing you to receive your full tax refund. They meet the need for immediate income but come with a cost. Like Payday loans, RALs are risky. The New York Department of Consumer Affairs lists RALs as one of the five types of loans to avoid. While they are called “instant refunds” they are actually high-interest, fee-loaded loans. When the administrative and lending fees are totaled, RALs can carry an annual interest rate of 300%.

As anyone who’s filed their own taxes knows, it’s easy to make a mistake and overestimate your return. If you select a Refund Anticipation Loan, you end up owing, with interest, any difference between your anticipated and actual refund. If you take a RAL and are expecting a sizable return and that return ends up being much less than you anticipated, you and not the person who prepared your taxes could be liable for a large amount of money. Ultimately, Refund Anticipation Loans indicate a lack of proper planning. If you plan ahead and optimize your tax withholdings you can end up with a smaller tax refund, which is better in the long run because it gives you more money to spend throughout the year.

Wise Alternatives to Refund Anticipation Loans

Instead of Refund Anticipation Loans, taxpayers have other, wise and convenient options, like E-file and E-deposit. When Mrs. Frugal Rules and I both used to work for employers instead of being self-employed, we filed our income tax return online. For years, I used online tax filing and had our refund deposited directly into our checking account. The process of filing taxes online took 7-10 days. RALs take 1-3 days; in my opinion, it’s worth it to wait an extra week to get all of my refund instead of only a portion of it.

My Personal Experience with a RAL

If you’ve taken out a Refund Anticipation Loan in the past, don’t feel bad. We all learn from our mistakes. In the first year that Mrs. Frugal Rules and I were married, we were expecting a huge tax return in the neighborhood of $5,000 and were planning a cross country move. I decided to take out a RAL so we could access our tax refund money faster. I knew we were losing money to fees but at that point in time, it was a cost I was willing to pay. I was a different person back then and have learned much in the past decade about the importance of living with a budget, living within my means and planning ahead when it comes to personal finances. Today, I E-file and try to limit my refund so that it’s as small as possible because I know that means more money for my family to live on throughout the year.

Have you ever used Refund Anticipation Loans or are you planning to this tax season? If so, what was your experience with them? Were they worth it?


Photo courtesy of: Matt Aiello

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About the author:

I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. You can connect via Twitter / Facebook.

45 comments on “Why You Should Just Say No to Refund Anticipation Loans

  1. 300% rate! sounds like a lucrative business, even more than payday loans since a tax refund is certain, with payday loans there is still a small chance your company may default. If you are strapped for cash you should charge a credit card, at 20% APR it suddenly sounds like a bargain. You can charge as much purchases as possible to get a month free interest and get a little cash for the rest. Smart move on limiting the tax return anyway,there is no reason to lend free money to the government.
    Pauline recently posted..Big city life, is it worth it?My Profile

    • You’re exactly right Pauline! I am in the wrong business at 300%. ;) That’s a great point about credit cards. I say that if you’re responsible with them then that should be route you take.

  2. I’ve never gotten a RAL before but a few of the people I’ve worked with before have and I agree with you they only get it because of poor planning. In fact one guy I work with wanted it so bad that he continuously asked for his W-2 and you would have thought he really need the money for emergency expenses or something.


    He wanted the money to buy another vehicle and a 4 wheeler and took a RAL to get it faster. I guess some people just wan to do things the hard way.

  3. We started seeing these in our office over the past couple of weeks in the form of prepaid debit cards from H&R Block of similar. I think it’s terribly shady. For one, these are probably people with simple returns if you are able to file in January, so you could probably do it yourself, saving the fee for a preparer. I’ve seen the kiosk in WalMart. These are not CPA’s! You are very right about getting a refund within 10 days if you efile and edeposit. I am always amazed at the amount of instant gratification people will take advantage of if it is presented. Great post idea.
    Kim@Eyesonthedollar recently posted..Free Money Finance March Madness, Please Vote!My Profile

    • I’ve seen the same thing as well Kim and it just makes no sense to me at all. You’re right that 99% of them are very simple and could be done in about 10 minutes by most.

  4. I haven’t and I wouldn’t. When you e-file with direct deposit, you your refund as little as 8 days later. Since doing things that way, I’ve never had a refund take more than 2 weeks (except for the year that I added an extra digit in my account number, what a mess!) If you can’t wait 2 weeks for your money, you are in bad shape indeed.
    Edward Antrobus recently posted..Meet the 2013 $3K ChallengersMy Profile

  5. In my mind RAL’s are as bad as payday loans. They are there to take advantage of anyone that needs short term cash very quickly and hasn’t developed the financial acumen to manage their budgets or money. I guess you can say that they’re kind of like the pawn shop of tax returns :D
    Jose recently posted..Confessions of a Tool JunkieMy Profile

    • I could not agree more Jose. I think that for the large majority out there it really is taking advantage of their lack of knowledge, which is just a shame. I love the pawn shop comparison.

  6. John I live that you finished the post confessing your own experience with RAL’s. Sometimes it easy to spend all our time beating ourselves up over past mistakes. You can’t change them, so stop spending so much time beating yourself up. Pick yourself up, brush yourself off, remember what those bad mistakes taught you, and move forward! Happy refunds (hopefully) everyone!
    Mandy @ MoneyMasterMom recently posted..A Parental Temper TantrumMy Profile

    • That’s just it Mandy! We all make mistakes, otherwise we’d not be human. I find that often times the lessons I learn from mistakes are ones that stick with me the most.

    • I feel the same exact way Justin. You bring up a great point and it’s one I think that some do prey on. This is the very reason why I think we need some sort of basic financial education taught in schools.

    • That’s a good question. I think a lot of it comes down to lack of financial knowledge/discipline combined with companies marketing them to those individuals. With the quickness of E-Filing there is no real reason to get a RAL. Personally, I’d much rather have the money throughout the year anyway as opposed to giving an interest free loan to the federal government.

    • Be glad that you never have Miss T! They’re a terrible product that promise cash fast if you qualify for a refund. It’s really a payday loan in different clothing.

    • That’s the thing Ian, many people who get them have the easiest returns to file and would be better served in waiting on the money. The fees are just absolutely ridiculous.

    • They actually are, they’re just being offered under a different name but still the same thing as the RAL’s. Liberty Tax Services offers what’s called a Instant Cash Advance which is loaded with the same bloated fees and risk to get a return within 24-48 hours and H & R Block offers Refund Anticipation Checks, which are again the same basic thing. These are just to name a few of the tax prep companies.

      While the word may not be used, the same product is being pushed on uninformed individuals all to get them cash quicker so it can be spent quicker.

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