It’s tax time again and that means that many people are looking forward to receiving a sizeable tax refund check in the very near future. Getting your hands on that money that is rightfully yours can mean a lot to some people. Some people will pay off urgent bills with the money, some may take a vacation, and some may use it as a down payment on a new car.
Sometimes people just can’t wait for their refund check to arrive so they take out a tax refund anticipation loan (RAL) to speed up the process. If you can’t wait for your refund check to arrive and you are thinking about taking out a refund loan, here’s how refund anticipation loans work and some of the things that you should think about before you sign up for one.
A tax refund application loan is a loan that allows you to access the money that you are due from the IRS for a tax refund, before the IRS has made the payment. They are advances against your tax refund and they are often offered by tax preparers. The loan is repaid from the refund that you eventually receive from the IRS.
An RAL is very similar to a payday loan, in that is an advance on money you are expecting to receive. Unfortunately, RALs are also similar to payday loans in respect of the high interest rates and high fees that are charged for them as well. Interest rates on an RAL could be anything between 50% and 700% APR and arrangement fees could be in excess of $30.
The one big advantage of anticipation loans is that they make the funds from a tax refund available almost instantly. The application for an RAL is usually very fast, obtaining a loan of this type does not necessarily depend on having a good credit rating, and the funds are usually made available within days rather than the weeks that you would have to wait for your tax refund to arrive. If you do need cash urgently then an RAL is certainly one of the options that is available to you, but you should also consider the disadvantages of these types of arrangements as well.
The main disadvantage of an anticipation loan is the high cost that we have already mentioned. Depending on which lender you use, the cost of an RAL can be as high as the cost of a payday loan, which for many people will outweigh the advantage of receiving the money sooner than they would had they waited for the IRS check to arrive.
A second disadvantage to this type of loan is that you could find that the amount that you borrowed exceeds the amount of your refund. That can happen if your tax preparer makes a mistake, some of your deductions are disallowed by the IRS, or the IRS delay the payment of your tax refund for any reason. If that does happen, you are still under an obligation to repay the loan in full and, if you extend the term of the loan, the additional fees and interest can be extremely high.
If you do need to gain access to your tax refund money fast, there are some alternatives to RALs. The first would be to file your taxes online, which can greatly speed up the refund process, especially if you already have a bank account. Many states now offer free online filing for those people who are in the lower income bands.
The other alternative is to look at other sources of loans, perhaps from online loan matching services. As with any loan, it is advisable that you do shop around for a loan against your anticipated tax refund, and you go with the best deal that you can find. You will often find that a loan from a standard short-term loan provider will be a lot cheaper than an RAL suggested by your tax preparer.