Understand And Beware Of Refund Anticipation Loans – RAL

Thursday, March 25, 2010, AM | 2 Comments

Many of us have already received tax refund – big and small. Some who are in dire need of the refund money now than wait for something like two weeks are increasingly taking advantage of Refund Anticipation Loans (RALs).

These loans have extremely short duration and last for as little as when you actually receive the refund. They are repaid automatically when the IRS issues the borrower’s refund.

They are initiated by tax preparation services and issued by several banks, including JP Morgan Chase and HSBC. Chase works with independent tax preparers. H&R Block also issues RALs through its affiliate, Block Financial Corporation

Of course, you pay extra for RAL. Just H&R Block customers alone paid $143 million in fees in 2009 for the year 2008 tax filing. That adds up to the bottom line of the RAL lenders. The Block does the tax filing to IRS free of charge as they should. Because of their needs, customers ask for the refund loan.

Folks pay hefty for Refund Anticipation Loans

Some experts suggest that if your refund is $300 and you opt for RAL, the fee normally is $34 which comes out to be the equivalent of 500% Annual Percentage Rate (APR) in interest for a two-week period. On top of that some tax prepares and banks charge $40 add-on-fee [whatever that is]. That’s extremely high APR, according to a recent report on the RAL industry issued by the National Consumer Law Center and Consumer Federation of America, both consumer advocacy groups.

Who needs the Refund Anticipation Loans

You guessed it right, the low-income folks like us – about 86% of the taxpayers, and nearly two-thirds (63%) were recipients of the so-called Earned Income Tax Credit, the nation’s largest anti-poverty program, according to the Internal Revenue Service.

That means the less money you make, the more you pay in taxes because these folks have no clue and have never heard of any loopholes that the good old Congress has bestowed upon the higher-income taxpayers.

In a Nutshell
I used to hear that kind of rate offered by mafia in the 1970s when I lived in New York City. If someone didn’t pay, he [in almost all cases, it was a he] would disappear in the darkness of the following night. But, by and large, we seem to be more civilized now. IRS takes care of us. The fee is against the tax refund. So folks are safe there as opposed to their disappearance.

The Refund Anticipation Loans can make an easy, low-risk profit for the lenders that extend them. They are secured loans – secured against the tax refund. So the tax preparers always win with such a hefty interest rate. It’s always the poor folks that lose on top of the mere fact that they are already poor and that they could use the minimum $34 in fee if they didn’t have to pay it.

So if you can somehow wait the two or so weeks to get your refund, try to avoid Refund Anticipation Loans. Otherwise, it will put you in the debt pit faster and deeper.

What do you think?

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  1. 2 Responses to “Understand And Beware Of Refund Anticipation Loans – RAL”

  2. By cna training on Apr 5, 2010, 5:10 pm | Reply

    Great site. A lot of useful information here. I’m sending it to some friends!

  3. By Shafi on Apr 5, 2010, 5:19 pm | Reply

    Thanks Chased

    I appreciate that.

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