Why you should avoid the tempting offer of an instant tax refund: while not technically a scam, refund anticipation loans (known as RAL’s in industry jargon and often advertised as “rapid refund” loans) are used to get cash to consumers in as little as 24-48 hours after a return is filed.
What is generally not well disclosed to consumers is that such “refunds” are actually loans from the tax preparer, often with hefty fees and even heftier interest rates (149 percent in some cases!). And, for consumers whose tax refunds are unexpectedly withheld from the government, they are still obligated to repay the loan, at the exorbitant interest rate. Such loans are often targeted at low-income and immigrant communities, preying on unfamiliarity with the tax system.
McClatchy Newspapers report that, in recent months, a number of big-name tax preparers, including H&R Block, have stopped offering RALs because their banking partners have been forced to back out by federal regulators. But about 7.2 million U.S. taxpayers used RALs in 2009, paying about $606 million in loan fees, plus an additional $58 million in add-on charges, according to a recent study issued jointly by the National Consumer Law Center and the Consumer Federation of America.
Fewer consumers are falling for the promises of an RAL, thankfully, but the offer of more quickly getting your tax refund – especially when times are tight – is still appealing to many consumers. Avoid the need for an RAL – do your taxes early, and monitor and adjust the taxes that are withheld from each paycheck throughout the year so you can avoid loaning Uncle Sam money you could be making better use of.