For some people, the anticipation of receiving a tax refund is so strong that they’re willing to pay to expedite the process. Tax preparers have seized this opportunity to profit on consumers’ impatience, and offer the refund anticipation loan (RAL). The opportunity to get immediate cash can even be tempting for those involved in agriculture, as many farmers and ranchers need the money to prepare for spring. But it is important to know that, in our society, convenience comes at a cost, and the RAL is no exception.
Refund anticipation loan advertisements make it seem like a win-win situation for the consumer: After having their taxes prepared by a professional, clients sign a form, pay a small fee, and walk away with a loan of up to $5,000 against their upcoming refund. But critics of the RAL say it is rarely a wise financial decision.
“What makes the RAL so impractical is it is extremely costly and only saves the filer about 10 days of waiting for a refund,” said Mark Foster, Director of Education for Credit Counseling of Arkansas (CCOA). “For example, if you are expecting a refund of $2,050, you may pay about $250 in fees and interest associated with the RAL. That means your net refund will be only $1,800. You need to ask yourself: Is my 10-day advance worth the $250? That’s good money that could have been put into savings, paid down debt, or even financed a nice family outing.”
The RAL is also notorious for its sky-high interest rates. The Consumer Federation of America (CFA) reports that the average annual percentage rate for an RAL can range from 40 to 1,700 percent. This astounding figure is in the neighborhood of another get-cash-now/pay-later institution: the payday advance store.
RAL opponents also contend that dealers target their services to lower-income clients who live paycheck to paycheck, and therefore find the fast-cash offer too difficult to pass up. They also point out that many lower-income people rely heavily on professional tax preparers to process paperwork for the Earned Income Tax Credit (EITC). After utilizing the tax preparer’s services to process the EITC, these consumers often opt for the RAL with the same company. In fact, a report by National Consumer Law Center found that – during any given tax season – about 40 percent of the 12 million consumers who receive an RAL also received the EITC.
The good news for consumer advocacy groups is that refund anticipation loans may soon become obsolete. With ongoing technological developments, experts predict that electronic filing will eventually be able to produce a refund in only a few days. However, until that happens, many taxpayers will still opt for the immediate payout provided by the refund anticipation loan. Just remember that when you resist the immediate gratification of the RAL, your patience will pay dividends.
Mary Catherine Harcourt is a Director of Financial Systems with Credit Counseling of Arkansas.