Stay Away from RALs (Refund Anticipation Loans)

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By Consumers Union on Friday, March 5th, 2010

Tax season is in full swing–which means it’s time for that reminder to STAY AWAY from RALs, or Refund Anticipation Loans. They are sold as fast, easy, instant money options by tax preparers like H&R Block and Jackson Hewitt.

What is a RAL?
Refund anticipation loans are loans secured by taxpayers’ anticipated tax refund.
RALs cost 50 to over 500% effective APR and are repaid in less than two weeks by deposit of tax refunds from the IRS.

How do they work?
Basically, it’s a loan extended to you based on your pay stub.
Tax preparation companies make an estimate of your future tax refund based on the amount you make and the amount of tax you pay as disclosed on each stub.

The big pitfalls:
So, if the tax preparer makes a mistake, you may be unable to repay the loan when your real tax refund arrives. More important, this may be the most expensive loan you’ve ever gotten.

The Cost to Consumers:
(From NCLC/Consumer Federation of America’s 2010 Refund Anticipation Loan Report)

$738 million in RAL fees in 2008
Consumers paid an estimated $738 million in RAL fees in 2008 to get quick cash
for their refunds – essentially borrowing their own money, sometimes at
extremely high interest rates. This price tag declined from $833 million in 2006,
due in part to an expansion in price cuts by H&R Block and JPMorgan Chase.

PLUS Another $68 million in other fees

In addition to RAL fees, consumers paid another estimated $68 million in
“application,” “administrative,” “e-filing,” “service bureau,” “transmission,” or
“processing” fees. Since the major preparation chains did not charge these fees in
2008, we based this estimate on an assumption that about 20% of RAL borrowers
are charged this fee.

Triple digit APRs
The APRs for RALs can still reach triple digits. The RAL industry claims that the
loans carry an APR of 36%, but that calculation does not include the fee for the
dummy bank account used to repay the RAL. If the dummy account fee is
included, the effective APR for RALs under $1,000 is still in the triple digits, with
the APR for a RAL of $300 still being nearly 500% based on a 10-day loan
period. The APR for a typical RAL of $3,300 is 72% while the APR for the
maximum amount of $10,000 is about 50%.

For more information:
Tips from Our Resident Money Mom

Center for Responsible Lending put together this Interactive Slideshow:
http://www.responsiblelending.org/chart/ral-signs.html
http://www.responsiblelending.org/chart/ral-signs-2.html

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