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Are Tax Refund Loans Worth It?

The refund may be faster, but you'll get less

Q. What's the scoop on the "rapid refunds" I see advertised by tax preparation services?

A. Marketed as an easy way to get a faster tax refund, so-called rapid refunds are technically known as refund anticipation loans (RALs) — and note the last word.

RALs are not a courtesy advance of what you expect to get back from Uncle Sam. Rather, the tax preparer or a partner bank lends you the amount of the anticipated refund, minus interest and fees — and note the last four words.

Under RAL terms, when the IRS issues your refund, it's direct-deposited to the lender; and what you receive can be quite a bit less.

In 2009, some 7 million American taxpayers received RALs — and paid more than $650 million in interest and fees, reports the Arkansas Attorney General's Office, which, along with other state AGs and consumer-protection agencies, warns against taking out RALs.

"Refund anticipation loans are similar to payday loans — with high interest rates of 50 percent to a whopping 500 percent," notes the Better Business Bureau. "You may get your refund faster, but you will not be getting as much money as if you wait for a government refund check."

Expect more problems if your actual refund is less than anticipated or if you fall into another RAL-associated trap, borrowing more than the expected amount of your refund, as some RAL lenders allow. In that case, the high interest rates will apply to the entire amount, not just the amount of the refund.

Consumer groups applauded last year when the IRS announced it would no longer tell refund lenders whether particular taxpayers had debts to the government. This service had acted as a sort of credit check for RAL lenders, helping them weed out taxpayers whose refunds might be intercepted to settle those debts. The RAL market is expected to shrink this year because of this move by the IRS.

A better and fee-free route: File your tax return to the IRS electronically with instructions for a direct deposit of your refund into your bank account. If the IRS has no questions about your return, your money can arrive in as little as 10 days, the agency says.

By comparison, a mailed refund after e-filing usually takes up to three weeks. A refund after filing a paper return takes even longer and will usually be issued within six weeks of the date the return is received.

Sid Kirchheimer writes about consumer and health issues. Sid Kirchheimer writes about consumer and health issues. Check out the Ask Sid archive. If you don’t find your answer there, send a query.

Published March 2011

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