Tax refund anticipation loans or checks may sound like a good deal, but you’ll pay a high price if you take either offer from a tax-prep company.
A refund anticipation loan, or RAL, is when a tax-prep company gives you your refund in advance, for what seems like a small fee, but those fees are actually extremely costly. Refund anticipation checks, or RACs, provide short-term loans to clients who don't have the money up front to pay for tax preparation.
Because of pressure from regulators and consumer activists, this will be the last tax season RALs are available, in their place, tax-prep companies are offering RACs, although RALs may still be available through non-bank entities such as payday lenders.
The RAL 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 high. For example, a customer of tax-prep chain Jackson Hewitt requesting an RAL of $1,500 through Republic Bank, would be charged $61.22, according to a report by the National Consumer Law Center and Consumer Federation of America. That translates to an annual percentage rate of 149 percent.
With an RAC, you're given a temporary bank account and once the IRS deposits the refund into that account, you're charged a service fee plus the cost of tax preparation. The bank then issues you a check or prepaid card and closes the account. This year, the RAC service fee is about $30 to $32, according to the NCLC, and that's on top of what it costs to prepare the return.
Instead of an RAL:
File your federal tax return electronically and choose direct deposit, you may only wait a few days for your refund. The IRS says it can process a return and refund in as little as 10 days if you file this way. You can also have your tax 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. Or check for locations of the AARP's TaxAide program (geared toward taxpayers over age 60). Free online tax prep is available to all taxpayers through IRS Free File. You may have to pay to file state returns depending on your state.
For more on refund anticipation loans and checks see the full article, at our Consumer Reports' Money section, which has additional tax-time information, such as how to avoid tax season headaches. Plus, we recently reported on top tax scams and how you can avoid them.
One Last Bite: Final Year For Bank Tax Refund Anticipation Loans (pdf) [National Consumer Law Center and Consumer Federation of America]