A Refund Anticipation Loan (RAL) is a short-term consumer loan against an anticipated federal or state income tax refund. The term of the loan is the length of time it takes the Internal Revenue Service (IRS) to deposit the refund into a bank account after the borrower has electronically filed the tax return. Interest rates and fees are set by each lender.
How It Works
In a refund anticipation loan, tax preparers typically make a cash distribution to the borrower within 24 hours of preparing and filing the tax return. The cash distribution will be the amount of the anticipated refund less interest charges and fees. The loan can also be used to cover the tax preparation and filing fees. The IRS will send the borrower’s refund check to the tax preparer who uses the funds to repay the loan. If the refund is lower than originally anticipated, the borrower is still responsible for paying back the full amount of the loan.
What You Should Know
When considering a refund anticipation loan, it is important to understand the terms of the loan and all fees and interest being charged by the lender. The lender is required to disclose this information in writing before processing the loan. Tax preparers are also required to share the anticipated availability of refund dollars both with and without the loan. This allows potential borrowers to decide if earlier access to the funds is worth the costs associated with the loan.
Where Refund Anticipation Loan Are Offered
Most tax preparation companies promote and offer some form of refund anticipation loan. Check cashing companies will often offer RALs as well. There are also many retail establishments and third-party lenders willing to file tax returns and issue a refund anticipation loan in support of a consumer purchase.
Refund Anticipation Loans are one of many short-term loan options on the market to consumers. The balance of the loan is repaid by the borrower’s income tax return. There are typically few risks with this type of loan, but the fees and interest often make them expensive considering the short term nature of the loan.