What is a Tax Refund Anticipation Loan (RAL)?

Triston Martin

Feb 02, 2022

Third-party companies offer tax return anticipation loans for a borrower's anticipated tax refund. RALs are loans that advance a person's tax return in the form of cash. If the borrower gets a federal income tax refund, they can pay back the loan. Substantial tax-preparation corporations, not the government, make most loans.

How Tax Refund Anticipation Loan (RAL) Work

Individuals may be eligible for a tax refund when filing their yearly income tax returns. Tax refunds are returned from the excess amount of income tax that a taxpayer has paid to the state or federal government, generally through withholding from a paycheck. Today, most Americans receive a refund of their federal income taxes.

Federal government checks, U.S. savings bonds or direct deposits to a taxpayer's account are all options for receiving refunds from the Treasury Department. The Internal Revenue Service (IRS), the agency in charge of tax collection, usually issues refunds within a few week of a taxpayer submitting their annual tax return. As a general rule, direct deposit is the fastest means of receiving a taxpayer's return.

A tax refund anticipation loan(RAL) is an option for those who want to get their money even faster. The United States Treasury or the Internal Revenue Service does not provide these loans. Therefore, the lender's interest and fees apply to them. Big tax preparation organizations often give loans for tax return anticipation to individuals who anticipate receiving refunds of less than a few thousand dollars.

Tax Refund Anticipation Loan Pros and Cons

A tax return anticipation loan allows borrowers to borrow money from their upcoming refund in advance. Borrowing money from a bank or credit union to pay a tax refund is usually a bad idea because the government routinely returns the money to taxpayers within a few week of completing their return.

Because of its short-term advantage of refund anticipation loanscan be a high-risk investment. A tiny percentage of the return may look like a high-interest rate to the borrower if the lender charges interest. However, when extra fees and levies are considered, the final cost might be significantly greater.

There are several ways to look at tax refunds. Still, the most common is that they are either money saved or a financial windfall—a taxpayer's tax-free borrowing to the government increases in direct proportion to the size of their return.

What is the Purpose of a Tax Return Advance Loan?

A private financial services business can help taxpayers who are expecting a refund from the Internal Revenue Service(IRS) by providing a loan in advance of that refund. Short-term loans are a popular choice for individuals struggling with their finances.

5 Tax Refund Loan Facts You Should Know

Get ready for tax season and put a stop to "quick refunds" that are offered in the form of return anticipation loans. They're a pricey choice that many taxpayers choose without recognizing how expensive—and possibly unnecessary—they are. Here are five things you should know about RALs, including cheaper and less dangerous alternatives.

1.You Pay to Borrow Money.

RALs are short-term loans made by non-bank lenders—usually with periods of only 7 to 14 days—that are secured by your projected return. Taxpayers who take out RALs collect cash in the amount of their expected refund, less any costs, within a few days after applying for the loan. That's why in exchange for their money, individuals agree to pay a triple-digit annual percentage rate (APR). The lender often sets up a separate account to receive the taxpayer's return. The loan is paid in full when the recovery arrives.

2.You're taking a Chance.

You take on additional debt if your return is delayed or is less than expected if you take out an advance refund loan (RAL). In the short term, RALs are pricey, but if something goes wrong with your return, they may be devastatingly expensive. Over time, substantial debt may build up and harm your credit score.

3.RALs are Pricey.

Fees for tax preparation and check processing may also be included in the loan application costs of up to $400. Your tax preparer may also provide a "peace of mind" assurance you'll get the return is shown on your tax form, up to $100 or more. The fees and interest rates associated with RALs are also rather high, often starting at 36% and escalating from there. Basically, what are we saying here? Budget at least $200 for a $2,000 "quick" tax refund.

4.RALs can show up in Unexpected Locations.

Most people encounter "quick refunds" at tax preparation and filing businesses. However, these aren't the only sites where you may be offered a RAL. Many companies, including car dealerships, boat dealerships, and furniture and electronics retailers, provide these loans.

5.There are Better Options.

There are alternatives to RALs that are less costly and more effective. Be patient, and the IRS will mail your tax refund to you at no cost. A direct transfer of your refund to your bank account can reduce the time it takes for the IRS to process your return by up to eight days.

In many circumstances, saving hundreds of dollars by delaying only a few days or weeks might be advantageous. Open a bank or savings account if you don't already have one so that your refund may be transferred directly into your account. Most banks and credit unions offer this as a free service. Free tax preparation programmers provided by the IRS are another way to obtain free tax assistance.

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