Tax Refund Loans: Instant Trouble

tax refund loanA tax Refund Anticipation Loan (RAL) is a loan based an expected federal income tax refund. You generally pay fees and interest to obtain a RAL. They are offered starting in January through the end of the tax season in April. RALs are no longer available from banks, although other firms may still offer this expensive and unnecessary product.

Watch out for:

  • RALs from non-bank financial firms, like payday lenders. RALs often carry extremely high interest rates and come with extra costs like electronic filing fees and fees to cash the loan check. You can end up spending more than 10% of your refund to get the money only a few days sooner.
  • Refund anticipation checks (RACs) –A RAC is temporary bank account that a bank opens for you to direct deposit your tax refund from the IRS. Once the refund is deposited, the bank issues you a check or prepaid card and closes the account. RACs are not loans, and typically cost $30-35, but often come with add-on fees of hundreds of dollars more. And they don’t deliver refund any faster than the IRS can.

How to get your tax refund back quickly without paying for a high-cost RAL or RAC

Visit a free tax preparation site— At sites sponsored by the IRS, trained volunteers can prepare your tax return for free and file the return electronically to speed up your refund. Some sites offer services to help open a bank account or get a low-cost prepaid card where the refund can be deposited.

  • Volunteer Income Tax Assistance (VITA) sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations. To find a VITA site, call 1-800-906-9887 or visit www.irs.gov.
  • AARP Tax-Aide sites are available free to taxpayers with low and moderate income, with special attention to those 60 and older. To find an AARP Foundation Tax-Aide site in your community during the tax season, call our toll-free number at 888-AARP-NOW (888-227-7669) or visit www.AARP.org/taxaide.

E-file and request direct deposit — There are a number of websites that allow many taxpayers to prepare and file their taxes online for free. Visit www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free for more information.

If you have a bank account, you can file your return online and have the IRS electronically deposit the refund directly into your personal checking or savings account. Most tax refunds are issued in 21 or less with e-filing and direct deposit. Taxpayers without a bank account can get the same three week or less refund by e-filing and having their refund deposited to a prepaid card, including any existing payroll or prepaid card that the taxpayer already has.

Getting Your Refund: You can check on the status of your tax refund at www.irs.gov/refunds. Be careful not to count on getting your refund by a certain date to make major purchases or pay other financial obligations. Many different factors can affect the timing of your refund after the IRS receives it for processing. And if you are counting on using your refund as soon as it arrives, be sure to consider the time it takes for your financial institution to post the refund to your account.



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