Each year many taxpayers - - anxious to receive their refund as soon as possible - - go to a professional tax preparer and take out a “refund anticipation loan.” It’s tempting to get your refund  immediately, but refund anticipation loans (RALs) are a BAD deal for taxpayers.  The costs are high and the benefits simply aren’t worth it.  If you file your return electronically and use direct deposit, you’ll get your refund in about 10 days - - without paying any extra fees or costs for a RAL.  And in these tough economic times, taxpayers need every dollar of their refund.

New figures reveal that, in 2007, 8.67 million American taxpayers took out RALs and spent $833 million in  loan fees, plus over $68 million in other fees. In addition, another 11.2 million taxpayers spent $336 million on related financial products to receive their refunds.

Some facts about RALs

RALs are bank loans secured by the taxpayer’s expected refund -- loans that last about 7-14 days until the actual IRS refund repays the loan. You are actually paying a high price to borrow money that already belongs to you!

Low-income consumers are mostly footing the bill for high cost RALs.  Indeed, over half of RAL consumers are recipients of the Earned Income Tax Credit.

RALs are extremely expensive.  Loan fees typically range from $34 to $130, which is usually broken down into a “Refund Account” fee and a “Bank Fee.”
Some tax preparers may charge one or more separate add-on fees, sometimes called “application,” “administrative,” “e-filing,” “service bureau,” “transmission,” or “processing” fees. Add-on fees can range from $25 to several hundred dollars. RAL loan fees can vary significantly and RAL fees, combined with tax preparation, electronic filing, and other fees, can end up eating away a big chunk of your refund.

In general, the effective annual interest rate (APR) for a RAL can range from about 50% to nearly 500%. If a $40 add-on fee is charged and included in the calculation, the effective APRs range from about 85% to nearly 1,300%.

Example:
For a tax refund of $2000, you might pay to get a RAL:
RAL loan fee:                                           $75
Electronic filing fee:                                  $40
Combine that with the fee you will need
to pay to the tax preparer:                        $100
Total:                                                     $215
This is over 10% of your refund!
This RAL has an APR (Annual Percentage Rate) of 142% if it beats the IRS by 10 days.

Ways to Save At Tax Time

Here are ways to take a pass on that RAL – most folks don’t need one — and save money at tax time:

E-File with Direct Deposit. File your tax return electronically (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.

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.

Get a bank account. If you don’t have a bank account, open one up to take advantage of direct deposit.