| DON'T BORROW TO PAY YOUR OWN MONEY: The truth about Refund Anticipation Loans (RAL)
How would you like to a pay a super-high price to borrow money that already belongs to you? Sounds ridiculous, right? But that’s pretty much what happens to many folks at tax time in the crazy world of Refund Anticipation Loans or (RAL).
You may be tempted by tax-time advertisements for “Fast Cash Refunds,” These ads will offer to get you your refund in just a day or two, or even on the spot. Beware! Many of these “fast refunds” are really LOANS.
When you get a RAL, you are borrowing against your own tax refund money. And RALs are often marketed to people who need money the most-low-and moderate-income workers who receive the Earned Income Tax Credit.
Don't Pay Triple-Digit Interest Rates to Borrow Your Own Refund
RALs are extremely expensive. Loan fees typically range from $30 to $90, which translates in Annual Percentage Rates (APRs) of about 60% to over 700%. If you paid those rates on all your borrowings you had probably go broke! And all to get your tax refund just a few days earlier, when you can for free from the IRS. You’re lining someone else’s pockets with YOUR hard-earned money!
RAL fees, combined with tax preparation, electronic filing, and other fees, can end up eating away a big chunk of your refund.
RALs Can Be Hazardous to Your Financial Health
In addition to their high costs, RALs can be risky. Since a RAL is a loan from the bank in partnership with the tax preparer, it must be repaid even if the IRS denies or delays your refund, or your refund is smaller than expected.
If you don’t pay back the RAL, the lender will take actions to hurt your credit rating and may send your account to a debt collector. In addition, when you apply for a RAL, you are giving the lender the right to grab your tax refund to pay for old tax loan debts that the lender claims you owe.
Example of how it works
| For a tax refund of $2000, you might pay to get a RAL: |
RAL loan fee: |
$75 |
Electronic filing fee: |
$40 |
Combine that you will need to pay a tax preparer: |
$100 |
Total: |
$215 |
| This is over 10% of your refund APR of 142% |
| Source: National Consumer Law Center www.consumerlaw.org |
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Ways to Save at Tax Time
Here are ways to take a pass on the “RAL” (Refund Anticipation Loan)- most folks don’t need one - and save money tax time
▪ E- File with Direct Deposit
File your tax return electonically (E-file) to speed up your refund. Tell the IRS to deposit the refund directly into your bank account - you provide your account number right on your tax return. You can get a refund in about 10 days this way- without paying one cent extra for a loan. Some of the free tax preparation programs (called “VITA” sites) can file taxes electronically. If you have internet access, you may be able to get free tax preparation and electronic filing at www.icanfile.org.
▪ Get a Bank Account
If you don't have a bank account, open one up to take advantage of direct deposit. You can use a savings account to receive your tax refund, and maybe save some of it for a down payment on a new home or business. This tax season could be more rewarding.
▪ Wait Just a Bit Longer
Do you really have to get cash from your tax refund today? Can you wait a few weeks to save almost $100? If you have an urgent bill to pay, ask for more time until the tax refund check comes from the IRS. Don’t take on a new expensive debt to pay an old bill.
▪ Avoid Check Cashiers
Check cashiers charge an extra fee to cash RAL and tax refund checks. Some check cashiers charge up to 7% to cash a RAL check - the average is about 3%. So if you receive a $2000 refund, it would cost you an average of $60 to cash the RAL Check - on top of the RAL and tax preparation fees. A smarter move is to use a bank account.
▪ Take Advantage of VITA
A great way to save money at tax time is to go to a Volunteer Income Tax Assistance (VITA) site. VITA sites provide free tax preparation to low- and moderate-income taxpayers. VITA sites are sponsored by the IRS and can be found in libraries, community centers, and other locations during tax time.
▪ Contact the nearest VITA
Online at: www.vastmi.org
Volunteer Accounting Service Team of Michigan
18145 Mack Avenue
Detroit, Michigan 48224-1444
Phone: 313-647-9620
Fax: 313-647-9628
E-Mail: info@vastmi.org
Or call the IRS general help line at 1-800-TAX-1040 or go to www.tax-coalition.org
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