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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.
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
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.
Senators Seek to Cap Interest Rates on Consumer Loans
The Hill (04/09/13) ;
Senate Majority Whip Dick Durbin (D-Ill.) and several other Democratic colleagues have proposed a bill to set an interest rate and fee limit of 36 percent for all open- and closed-end consumer credit transactions. The law would cover mortgages, auto loans, credit cards, overdraft loans, car title loans, refund anticipation loans, and payday loans. "As we climb out of the worst recession in a generation, many working families continue to struggle," Durbin noted. "For some, payday lenders offer a quick way to make ends meet, but often with devastating consequences." A 36 percent cap is already in place for enlisted persons and their dependents, and a number of states have adopted limitations as well. But Durbin's proposal measure aims to put all consumer transactions along a single track in an effort to address interest rates that can exceed 300 percent. The federal law would not preempt tougher state-level rules, however.
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Survey: Tax Refunds Will Go to Pay Down Debt, Boost Savings
Boston Herald (04/01/13) ;
About 45 percent of U.S. tax filers will use this year’s return to pay down debt and grow their savings, according to a survey of 251 consumers conducted by American Consumer Credit Counseling. Another 26 percent will put the refund directly into their savings. Fewer than 1 percent of respondents plan to use their tax refund to open or contribute to a retirement account or to pay down student loans. Steve Trumble, president and CEO of American Consumer Credit Counseling, pointed out, “Paying down debt is the single most important financial action that a consumer can take to achieve a financially stable future and it’s promising that those who have encountered financial difficulty in the past are making better decisions.”
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A New Variation of a Costly Tax-Time Offer
New York Times Bucks blog (03/27/13) ;
Tax refund anticipation loans -- advances on tax returns, made at high interest rates -- may be less prevalent due to federal crackdowns, but similar financial products are just as expensive. A report by the National Consumer Law Center and the Consumer Federation of America found that some tax preparation firms, including Liberty Tax Service and Jackson Hewitt, still make refund anticipation loans through non-bank partners. Other firms may offer a related item called refund anticipation checks. In fact, the number of consumers using this product jumped to roughly 18.3 million in 2011 from 12.9 million in 2009. Although not as expensive or risky as tax anticipation loans, these checks still amount to a high-cost loan. This can be a problem particularly because many taxpayers who sign up for these products already have low incomes. Refund anticipation checks do not get taxpayers their refunds any faster than if they had chosen to receive it via direct deposit. Banks typically charge fees of $30 to $55 for a refund anticipation check, which are added on top of the tax preparers' own fees. The fact that these expenses are lumped in with other fees also makes it tough to comparison shop for tax preparation fees. "Clearly, there is a need for reforms in the disclosure of tax preparation fees," the report concluded. "Tax preparers should be required to provide a clear, simple disclosure of tax preparation fees to consumers before beginning the process of tax preparation."
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Need Your Tax Refund? Accessing Early Is Costly
USA Today (03/20/13) ;
Although consumers in a tight spot financially can try to access their tax refunds early, the process usually costs more than it is worth. "It's quite expensive, when you think about it," notes Chi Chi Wu, staff attorney for the non-profit National Consumer Law Center. "At $30 to defer payment of about $200 for 20 days, you're talking a triple-digit APR." Specifically, this example amounts to a 273.75 annual percentage rate, plus the filer will have to forfeit some of the return to pay for the tax-preparation services. Refund anticipation loans largely have been forced out of business but the practice itself is not illegal, so many "fringe banks" and payday lenders still offer the products. A 2010 report from the U.S. Treasury found that most taxpayers who choose these alternatives are from low-income households, especially those who qualify for the Earned Income Tax Credit. Many of them, however, may qualify for help from the IRS Volunteer Income Tax Assistance and AARP-sponsored tax counseling for the elderly. Consumers who are desperate for immediate cash also could seek out small loans from a bank or a credit union, or help from local non-profit credit counselors.
High-cost car title loans, refund anticipation loans and auto loans plague people with limited resources, making financial stability difficult to achieve.
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