Warning Against Refund Anticipation Loans (RALs), What exactly is a refund anticipation loan?
It is estimated that low income families spent nearly $1 billion last year for refund anticipation loans. As tax season approaches, I wanted to warn you “saving savvy” taxpayers that no matter how strapped for cash you may be, it doesn’t pay to borrow your own money.
Consumer advocates at the National Consumer Law Center and Consumer Federation of America are warning taxpayers to steer clear of refund anticipation loans. These are avoidable tax-time expenses.
RALs are high cost bank loans secured by the taxpayer’s expected refund. The bank gives you the amount of your refund less tax preparation fees, loan origination and handling fees, and interest. The bank has your refund redirected to them to settle your debt. What the RAL industry does not want you to realize is that an electronically filed return will have a refund in 7-14 days. I understand that the fees may not seem much – some of them total about $125. It is still $125 that you are entitled to. The effective annual interest rate for a RAL can range from about 40% to 500%. We are supposed to be saving money, not wasting it! And not to mention that you are paying interest to borrow your own money!
In my business, I do prepare returns and I counsel my clients against these loans. However, I offer the service because many do not heed my advice and want the loans anyway. I don’t charge a processing fee for the loan to lessen my guilt.
As you prepare your documentation to meet with your tax professional, please remember my advice and just say no to RALs!
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