At tax time, avoid refund anticipation loans

Refund anticipation checks also are no bargain

Last updated: February 2012

If you just can't wait to get your tax refund, some tax preparers have an answer for you: a refund anticipation loan, or RAL. For what seems like a small fee, a tax-prep company will give you your refund in advance, within a couple of days of filing.

But those small fees are actually extremely costly, says a a report by the National Consumer Law Center and Consumer Federation of America (PDF). The fees represent interest you're paying on a very-short-term loan from a bank in partnership with the tax-prep company. When calculated as an annual percentage rate, the interest can be quite high. A customer of tax-prep chain Jackson Hewitt requesting an RAL of $1,500 through Republic Bank, for instance, would be charged $61.22, the NCLC says. That translates to an annual percentage rate of 149 percent.

Out with RALs, in with RACs

Under pressure from regulators and consumer activists, RALs are being phased out. In fact, this is the last tax season in which any bank will offer RALs, though they still may be available through nonbank entities such as payday lenders.

In place of RALs, tax-prep companies are offering refund anticipation checks (RACs), which essentially provide short-term loans to clients who don't have the money up front to pay for tax preparation. With an RAC, the consumer is given a temporary bank account. Once the IRS deposits the refund into that account, the customer is charged a service fee and the cost of tax preparation. The bank then issues the consumer a check or prepaid card and closes the account. The service fee for an RAC this year ranges from $30 to $32, the NCLC reports. That's in addition to what it costs to prepare the return.

You might find an RAC useful if you don’t have a bank account and need to carry your money on a prepaid card. The H&R Block Emerald Prepaid MasterCard, for instance, has zero liability if someone uses it without your permission.

But keep in mind that as with many other prepaid cards, it has attendant fees. They include a $2.50 ATM cash-withdrawal fee, a $1 ATM balance inquiry/ATM denial fee, and a $25 over-the-counter withdrawal fee.

Free and low-cost alternatives

Instead of an RAL: If you file your federal tax return electronically and arrange for direct deposit into a bank account, you may only wait a few days to receive your refund. The IRS says it can process a return and submit a refund in as little as 10 days of filing if the taxpayer files this way. You can also have your preparer file your return electronically for you.

Instead of an RAC: If paying for tax preparation is your concern, check the IRS's information on free help preparing and filing taxes for taxpayers of all ages. Or check for locations of the AARP's TaxAide program, which is mainly geared toward taxpayers over age 60. Free online tax prep is available to all taxpayers through IRS Free File. (Depending on your state, you still may have to pay to file state returns.)


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