March 2006 By Attorney General Tom Miller
Rapid Tax-Refund Loans
A very costly way to gain just a few days on tax refunds
It’s tax season, and tax preparers may invite you to get a “Refund Anticipation Loan” or “RAL” – a loan borrowed against the expected tax refund. Such a loan may come a few days faster than the refund – but you pay extremely high fees to borrow your own money.
Remember, a “Refund Anticipation Loan” is just that – a very short-term loan, secured by your expected tax refund, arranged by a tax preparer through a bank. You pay finance charges (and, most often, tax-preparation charges as well.) The loan is repaid when the IRS sends your full refund to the bank.
Refund anticipation loans are expensive. According to a report this year by the Consumer Federation of America and the National Consumer Law Center, the loans cost about $29 to $120, depending on the size of the refund. That means the interest rate on “RAL” loans could range from about 40% to over 700% APR (annual percentage rate of interest.) That’s a bad bargain for an “advance” of just 7 to10 days.
Consumers need to ask tough questions:
· “How much will I pay for the loan?” An average refund is about $2150, with a typical finance charge of $100 for a refund anticipation loan -- a 178% APR. Fees for tax preparation, electronic filing, or check-cashing can double or triple that cost.
· “What does the fee buy me?” An RAL loan gets your refund to you in 1-4 days, compared to just 7-10 days if by ordinary electronic refund deposit to your bank.
The Consumer Federation/Consumer Law Center report notes that about 56% of those who get refund anticipation loans are filing for “earned income tax credits” – payments under the federal program that entitles some low-income workers to a payment even when they don’t owe income taxes. The report indicated that almost $317 is subtracted from the average earned income tax credit refund when all fees are added for tax preparation, electronic filing, check cashing and the loan fee. That’s a lot to pay for a payment that comes just a few days faster. The best bet? Avoid high costs -- get free help from organizations that assist low-income filers. For a “Volunteer Income Tax Assistance” site or a “Tax Counseling for the Elderly” site near you, call
1-800-829-1040. Tax assistance sites in Iowa also will be listed at
Be a smart "consumer" in seeking your refund. For more information, contact the Attorney General's Consumer Protection Division, Hoover Building, Des Moines, IA 50319. Call 515-281-5926, or 888-777-4590 toll-free. On the Web :www.iowaattorneygeneral.org
Consumer Protection Division Hoover Building Des Moines, Iowa 50319 515/281-5926