Are They Worth the Hype?
Everywhere you look, you see tax preparation services promising you can get cash for your tax refund NOW, without the wait. But is it really worth having the money in your hands immediately?
Probably not. Refund anticipation loans, or RALs, were once issued on a large scale basis by banks. Those days are gone and most banks have now shifted to issuing Refund Anticipation Checks, or RACs. RACs often do not provide the taxpayer access to the tax refund any faster than the IRS, but instead allow the taxpayer the opportunity to delay paying for the tax preparation services. The bank opens a temporary account for the refund to be direct-deposited into. When the check arrives, the bank cuts a check to the taxpayer, less the amount of the tax prep fees and closes the account.
Although banks are no longer offering RALs on a nationwide basis, RALs are still being offered by independent lenders and tax preparers. Refund anticipation loans allow taxpayers to use their anticipated refund amount (based on the tax preparation by the lender), as collateral for the loan. But the instant gratification of a RAL comes with a hefty price–primarily in the origination fees and applicable interest. RALs, like any other loan, have fees associated with the application and processing for the loan. Fees are usually dependent on the amount of the loan or refund and can range from $80 to over $160.00. As with any loan, interest rates are applied.
The rate depends on the amount of the loan and can range from 40% to an astonishing 514%! Imagine if a revolving credit line had an APR of 40%. Assuming you are approved for the RAL, keep in mind that you will NOT be receiving the full amount of your tax refund. The origination fees, APR, and often times, the tax prep fees, are all deducted from the amount you receive. Here’s a strong word of warning: In 2012, several establishments were issuing Phantom RALs. Phantom RALs were loans being issued by lenders and tax preparation services without the financial capacity to fund those loans. This was considered a “bait-and-switch” technique to simply get customers in the door. The IRS eventually filed suit against one such service.
Rather than apply for an RAL, it is advisable to open a bank account and have your refund deposited into that account. Direct deposit takes roughly 14 to 21 days once your tax return is processed and you have the advantage of keeping the money and building a rapport with a bank. If you do not currently have a bank account and have no interest in opening one, another option that is increasingly gaining popularity and availability is having your refund issued in the form of a pre-loaded credit card. Before you choose this option, however, make an effort to learn more. Some pre-loaded credit cards do not allow you to withdraw the funds at an ATM. Some charge monthly service fees, making it inconvenient to use and reducing your refund as well.
