Refund Anticipation Loans (RALs):
- Are short-term cash advances against your income tax refund
- Have high interest rates and eat up a large portion of your refund
- Are offered by tax preparation companies who charge high fees for early refunds
- Can bring debt to users if the refund is calculated incorrectly
- Are marketed to moderate and low income consumers, those who can least afford it
How much could RALs cost me?
- A sample RAL can cost users $343 when loan, application, tax preparation and check cashing fees are included, according to the Consumer Federation of America.
- These fees can translate into triple annual percentage rates according to the National Consumer Law Center
- In addition, tax preparation companies selling RALs before taxpayers receive their W-2a can sometimes have incomplete information and overestimate your tax refund. That will mean you owe them when the check comes up short.
What are other options to RALs?
- Wait until you have all your W-2s and correct filing materials - then you can E-File and get your Illinois refund in a week and your federal refund in 10 days.
- You can make sure your refund is direct deposited to your bank account to ensure a speedy refund.
- For help filling your taxes, you can visit a site that offers free tax assistance (see list for site nearest you).
Where else can I go for information about RALs?
National Consumer Law Center has taken a leading role in advocating for legislation to regulate the use of Refund Anticipation Loans. Their study conducted in 2006 found that about 12 million taxpayers took out RALs in 2004, costing them over $1 billion dollars in loan fees. They also found that paystub or holiday RALs can be more costly for consumers with higher fees that translate into an annual percentage rate (APR) reaching the triple digits. Finally, their data showed that low to moderate income taxpayers are the most likely to use these loans. In 2001, approximately 72% of taxpayers who used RALs had adjusted gross income (AGI) under $32,280, while only 45% of all taxpayers fell into the same income range. EITC claimants purchased 55% of all RALs, even though these taxpayers represented only 15% of all filers.
The Center for Responsible Lending is another source of information on the Refund Anticipation Loans. Their site details data as well as policy suggestions to deal with the problems associated with refund anticipation loans. Their policy recommendations detail how to build a better RAL with lower interest rates, special fee structures for EITC consumers, and a bank account for unbanked recipients. They also suggest switching to Refund Anticipation Checks rather than RALs because they do not bear the risks of a loan, are less costly than RALs by about $75 for the average refund, and if designed differently, they could be useful tools to encourage asset development. Finally they also suggest encouraging stored value card which can deliver the speed of an e-filed/direct deposit refund for taxpayers without a bank account.
Consumer Federation of America has useful facts and data about the cost of RALs to the consumers and the drain on the EITC program. Their table shown below shows the cost to the individual taxpayer as well as the drain on EITC funds which are meant to help working low income families.
| Type of Fee |
Cost to Taxpayer |
Drain on EITC Program |
RAL loan fee
(includes dummy account fee) | $100 | $700 million |
Application / Administrative Fee
(for 91%) | $32 | $204 million |
| Total | $132 | $904 million |
| Tax preparation fee | $146 | $1 billion |
Check cashing fee
(for 45% of EITC recipients) | $65 | $205 million |
| Total with Tax preparation and check cashing | $343 | $2.1 billion |
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