Definition
A refund anticipation loan or RAL is a high-interest predatory loan secured by a taxpayer’s expected income tax refund.
Analysis
RALs are extremely popular among low income individuals and families that live from paycheck-to-paycheck. They struggle to pay their bills, and many are behind on major bills when they receive their tax preparation documents (W2s).
These taxpayers are normally so desperate to get their money now that they will pay almost anything to get it. Furthermore, many do not realize how much they are paying for the loans.
RALs carry interest rates that can be as high as 700% APR. When RAL fees and tax preparation fees are totalled, many taxpayers shell out as much as $300 – 400 for a fairly simple income tax return.
RALs allow a taxpayer to receive their refund normally within a day or so. This is the appeal of these loans, and the reason why they are so popular. Most do not realize that volunteer preparation programs can help taxpayers receive tax refunds via direct deposit in about 10 days, for free!
Simple income tax returns can be prepared for free and e-filed for free by volunteers. These programs are available through the volunteer groups and nonprofit organizations that partner with the Internal Revenue Service’s Volunteer Income Tax Assistance (VITA) program, or the Tax Aide program managed by AARP.
In 2008, the IRS initiated a study of RALs, their affects on low income taxpayers and on the accuracy of income tax returns filed with RALs. It is expected that the IRS will close the loophole that allows tax preparers to share taxpayer information with the banks that provide RALs, which could potentially protect taxpayers from such predatory loans.
