January 2007

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 in 2005 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.

Beware of the new “pay stub RALs” or “holiday RALs.” Pay stub RALs are offered earlier than traditional RALs before a taxpayer receives a W-2. The loans are based on a taxpayer’s latest pay stub which indicates his estimated tax return. However, the estimated amount may not reflect pre-tax retirement deductions, or money withheld for child support or taxes. The taxpayer will have to pay the full amount estimated on the pay stub whether or not the refund is large enough to cover the cost of the loan and fees. Pay stub RAL fees can be as high as other RALs.

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:

In February, a list of “Volunteer Income Tax Assistance” sites and a list of “Tax Counseling for the Elderly” sites in Iowa will be available at

Consumer Protection Division Hoover Building Des Moines, Iowa 50319 515/281-5926