What is a Refund Anticipation Loan?

Refund anticipation loan (RAL) is a short-term consumer loan in the United States provided by a third party against an expected tax refund for the duration it takes the tax authority to pay the refund. The loan term was usually about two to three weeks, related to the time it took the U.S. Internal Revenue Service to deposit refunds in electronic accounts. The loans were designed to make the refund available in as little as 24 hours. They were secured by a taxpayer’s expected tax refund, and designed to offer customers quicker access to funds.

The costs to the borrower could be significant compared to other lending and some consumer organizations warned consumers of the risk involved in this type of loan.[1] They are a largely discontinued financial product and beginning with the 2013 tax filing season, they have been largely replaced with the similar refund anticipation checks (RAC),[2][3] as well as a hodge podge of other financial products.[4]

RACs are temporary accounts which wait for the client's IRS tax refund, and which also provides a way for the client to pay for tax preparation out of the refund. Both financial products have similar fees and similar risks of third-party bank "cross-collection".

A similar process in Canada to a RAL is termed "tax rebate discounting".

1) What are alternatives to RALs?
Here are some ways to avoid the high costs and risks of RALs and get your tax refund back quickly at the same time:
E-file and request direct deposit — When a taxpayer e-files, they can request the IRS and the state to electronically deposit the refund directly into their personal checking or savings account. It typically takes less than 21 calendar days for the IRS and less than 10 calendar days for the state to process and electronically deposit a refund.
Open a bank account — A taxpayer should open a checking or savings account so their refund can be electronically deposited and available for immediate use. Many banks and credit unions will set-up an account for free. If a person chooses to use a check-cashing store, you will be charged fees to cash a check ($50 on average).
Visit a free tax preparation site (commonly referred to as VITA or TCE) — Trained volunteers will prepare an individual´s tax return for free. Plus, many sites will file the return electronically to speed up the refund. To find a VITA or TCE site, call (800) 829-1040, dial "211", or visit irs.gov.

2) How does the RAL process work?
When a taxpayer receives a RAL, the tax preparer lends the taxpayer the amount of their tax refund less the cost of interest and fees for the loan. When the government sends the actual refund check, it is directly deposited into the bank that made the loan. If the refund is smaller than anticipated due to deductions for items like unpaid child support or traffic tickets, the full amount of the loan must still be repaid.

3) How much does a RAL cost?
The cost of a RAL can vary widely and consumers should understand all the costs associated with this type of loan. RALs often carry extremely high interest rates. In addition, there are often other charges like electronic filing fees, application fees and a fee to cash the loan check. When all the costs of an RAL are added up, taxpayers can be spending more than 10% of their refund just to get the money a few days sooner.

4) What should I ask if I am considering a RAL?
Taxpayers should be sure to read the fine print and ask a lot of questions before signing up for a RAL. Remember that most taxpayers who file electronically receive their refunds in less than 21 days. Paying the costs associated with a RAL could be a large price to pay for getting your money a few days quicker. Before deciding on a RAL, make sure you know the answers to the following questions:
What is the interest rate?
What fees are you being charged?
What happens if your tax refund is less than you thought it would be?

5) Who offers RALs?
Businesses that prepare and file an individual's tax return typically offer RALs. This could include a tax preparation business, car dealership, furniture store, or check casher.

6) What is a creditor who provides RALs required to disclose in writing?
A creditor must disclose:
Any charges or fees for electronically filing the tax return.
The total dollar amount of all charges and fees.
The estimated annual percentage rate of the loan.
That the customer is responsible for repayment of the loan and the loan fees even if the tax refund is not paid or is paid in a lower amount than was anticipated.
The expected length of time by which the customer will receive the loan proceeds.
That the customer's tax return can be e-filed without obtaining a refund anticipation loan.
The anticipated length of time within which customers could expect to receive their refund if their tax return was e-filed, and the customer does not request a refund anticipation loan.