Why You Should Just Say No to Refund Anticipation Loans
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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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45 Comments
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.
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.
Fantastic advice. I’ve never taken one out, but I’ve dealt with clients who should have known better and asked about taking one out. They think a refund is found money. “I’ll just get a little less and I can have it now!” What’s a month? Keep a healthy respect for your money…..
Thanks Joe! I agree with the healthy respect. I’d rather have the money throughout the year as opposed to getting a fat refund at the end of the year.
I never have taken one out, and I hope I never have to! That’s a crazy rate.
It is a crazy rate, especially as they’re just preying on uninformed people in most cases.
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.
Nope.
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.
I think that’s what it comes down to is poor planning many times. Sadly, too many people are like that guy and view it as a windfall to buy something that probably should not be.
Wow Chris, that is an amazing story and a common theme among the “I need it now” crowd so prevalent in the U.S. right now.
Great post. PAL’s should be avoided at all costs, period!
Thanks Roger! I could not agree more.
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.
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.
The good news is you don’t have to worry about RALs anymore. As far as I know there are no banks that offer these “loans.” Any places offering them are just using fancy marketing now and you aren’t gettting you money any faster than the typical 8 to 21 days for an email with direct deposit.
http://bucks.blogs.nytimes.com/2012/01/19/after-this-year-no-more-tax-refund-loans/
e-file… apparently i got autocorrected!
You know, I have seen some different things the last few weeks where these companies are marketing the same basic thing just in a slightly different package.
Well said! RALs are right up there with payday loans as indicators of financial desperation. The goal is never to be in a position where one is tempted by such products!
Great point Kurt! That should be the goal to not be in a desperate situation.
Just another crappy loan product to pray on the need it nows and the uneducated. I have never used a RAL and wouldn’t do it. I will wait the week or two to get it in my bank account and move on from there. It is sad that these are even around.
Great point Grayson! We do the same thing and usually have it within a week or so.
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.
Ouch, I bet that made things interesting. We E-File as well and have it usually in a week or so.
Glorified loan sharks, I like that. It is ridiculous that people can’t wait an extra week for a refund they likely didn’t even know was due.
Amen Adam! In the end it’s only a week or so, which is not worth the risk or the fees associated.
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 😀
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.
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!
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.
Holy guacamole is that an insane rate! I actually didn’t know these types of loans existed, and I’m happy for that. No thank you! 🙂
I know Jen, it’s just nuts! I am in the wrong business, but then again I would have a moral issue charging so much.
It’s all a big, ridiculous scam to suck more money out of people that should know better. As a tax person myself, I hate hearing about these, and it just endorses the mindset of “I WANT IT NOW!” Ugh.
Preach it Jacob! I don’t know what I hate more though, RALS or the “tax” kiosks in Wal-Mart.
These loans drive me insane. And the people who often get them are the ones who need the money the most. They get the money, spend it within a week or two and then complain a few weeks later about being broke.
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.
I have never gotten a RAL before. But then again I don’t live hand to mouth and don’t need my tax refund as soon as possible.
I guess a better question is why are people getting these loans? Is it to feed their family? Or to buy the latest piece of iCrap? The former is understandable. The latter is just stupid.
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.
Thanks for the detailed post. I have actually never heard of these before. They sound like a real scam to me. People who are desperate can just get suckered in.
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.
I never took one of these loans. They remind me of the tax service type places. I remember working with people that had very east taxes, 1040’s and ez’s yet would still use the service to get their money faster and pay the fee. I was half tempted to do it for them and only charge half of what the big guys were charging.
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.
I agree 100% these are just another form of payday loans with ridiculous interest rates used to prey on individuals who need money quickly. Thank you for raisin awareness on this John.
You hit the nail on the head Marvin. There really is not much difference between the two.
I think you hit the nail on the head when you describe RALs to tax refunds what payday loans are to a paycheck. Very timely post by the way!
RALs are not being offered anymore by the tax preparation companies.
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.