Rapid Refunds: Instant Trouble

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Avoiding Costly RALsRefund anticipation loans may carry interest rates as high as 500 percent. AP Business Editor Mark Hamrick reports.

Refund Anticipation Loans Cut Deep into Taxpayers' Due

Similar to predatory payday loans, refund anticipation loans (RALs) are short-term cash advances against a customer's anticipated income tax refund offered at interest rates ranging from about 50% to over 500% APR.

Fast Facts

Fast Facts--Tax Refund Anticipation Loans

7.2 million taxpayers received RALs in the 2009 tax filing season (for tax year 2008).
87% of taxpayers who applied for a RAL in 2009 were low-income.
64% of taxpayers who applied for a RAL in 2009 were EITC recipients.
The price for a typical RAL is $61.22 to borrow $1,500.
The APR for a typical RAL is 149%.

More Fast Facts

What Are The Problems?

Refund anticipation loans (RALs) are bank loans arranged through tax preparers against a filer's anticipated income tax refund. Marketed as a quick way to receive one’s tax refund, the loans speed up the refund process by only a few days if any, and incur fees that equate to an APR of 149% to 250% or more--to borrow one's own money.

According to a study by the National Consumer Law Center and the Consumer Federation of America, refund anticipation loans drained the refunds of about 7.2 million taxpayers in 2009, costing them about $606 million in fees. The bulk of these fees comes from low-income taxpayers with recipients of the Earned Income Tax Credit (only about 17% of individual taxpayers in 2009) representing 64% of RAL consumers.

Learn more about RALs in our Research and Analysis section

What Are The Solutions?

There are alternatives to RALs: Taxpayers who file online and have their refunds deposited directly into their banking accounts can expect their refunds to be deposited in as little as 8 days.

The Internal Revenue Service continues to work hard on reducing refund processing time, and to find solutions for speeding refunds to unbanked taxpayers. For the 2011 tax season, 600,000 low and moderate income tax filers were invited to participate in a U.S. Treasury Department pilot program intended to offer a quick, safe and convenient alternatives, such as low-cost debit cards. Also, last year the IRS announced that it would no longer provide debt indicators used by tax preparers underwriting RALs. J.P. Morgan Chase, one of the top-three issuers of refund loans, voluntarily pulled out of the market.

An order from the Office of the Comptroller of the Currency forced HSBC to end its agreement H&R Block, who later announced it would stop offering refund anticipation loans.
The FDIC has told Republic Bancorp, the primary refund anticipation loan (RAL) provider for Jackson Hewitt and Liberty Tax Service, that the bank's RALs are "unsafe and unsound." The bank now faces a $2 million fine.

RALs in the News