If you’ve never heard of a “Refund anticipation loan”, or RAL, it’s probably a good thing. RALs, also known as “instant refunds”, are short-term loans that are made based on the notion that you will be receiving a tax refund from the IRS. But they come at a significant price in terms of fees and interest, and the costs in most cases outweigh these “benefits”.
With an RAL, a tax preparer will offer you immediate payment of your refund, but in exchange you will receive less money than you are entitled to. The incentive for you is supposed to be the “immediate receipt”, so you won’t have to wait for the IRS to issue you a refund check or deposit the money into your account. The tax preparer is then entitled to the full amount of your tax refund.
So what are you actually paying for these RAL services? The fees are ultimately similar to those charged for payday or auto title loans, which are widely referred to as “predatory” loans. The RAL loans are offered at high interest rates, ranging from about 40% to over 700% APR. In 2006, a study sanctioned in part by the Consumer Federation of America found that a consumer utilizing one of these RAL loans will likely pay approximately $100 for a refund of approximately $2,150. Although according to IRS regulations fees may not be related to the amount of your anticipated return, these figures indicate that in effect, the impatience of not being able to wait possibly only one additional week may cost close to 5% of a taxpayer’s return.
While the fees may appear minimal in comparison to the size of the refund, an RAL can be incredibly expensive once you consider the time frame in which you actually use the loan. With e-filing and all the available IRS partnerships that help consumers e-file for free, taxpayers can receive their tax refunds within three weeks and as quickly as ten to fourteen days if choose to receive their refund via direct-deposit.
According to the National Consumer Law Center (NCLC), 12 million taxpayers used an RAL in 2004. Despite numerous attempt by the IRS to change the refund anticipation loan system, they have thus far been unsuccessful. The concerns that have been expressed by the NCLC are that many tax preparers do not adequately educate their customers about RALs– many taxpayers have no idea of when they might expect to receive their refund using alternative or traditional methods, and most do not understand the fees associated with their loans. Even some of the largest tax preparers have been accused of predatory lending practices, including H&R Block who in 2002 settled a suit brought by the New York City Department of Consumer Affairs for their RAL lending procedure.
In summary? These tax refund anticipation loans are just another form of predatory lending, so steer clear of them.
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You seem to know your facts, but they simply aren’t complete facts. Refund Anticipation Loans cost between 3% and less than 5% of the amount requested. Critics and consumer advocates love to tack on every fee, such as tax preparation fees, to concoct their inflated APR when whining about RALs.
Whether you take a RAL out or not, tax preparation is a necessity for many Americans simply because the tax code is complex. That is a separate and distinct subject. Then of course Regulation Z (overseeing APR calcs) was devised for just that – “loans over one year”. It is not conducive for short term lending. In the case of RALs it requires a lender to state the APR as if the laon were being paid off every 11 days for a year (or 33 times). That’s not the case. Its paid once. But national banks must adhere to Reg Z in order toexport rate.
No one ever bothers to say RALs are low cost compared to many credit options for cash constrianed Americans (if they even have another option). BTW/ many don’t even have bank accounts to “direct deposit” into as you suggest. Simply telling people to “wait” for their money means you’ve never walked a mile in many of these customer’s shoes. Neither the IRS, consumer groups (or even you) can lend money at these rates…nor do they offer to. But the fact is, while RALs aren’t for everyone, the “need” for many still exists. Learn all the facts.
Let me ask you this….If I let you borrow $100 for 2 weeks because you had to buy a new tire for your car or else you wouldn’t be able to go to work and I asked you to pay me back $115 after 2 weeks, would keeping your job be worth $15 bucks? Yes it would. The interest rate would be 391% on that loan.
Capping the interest rate would mean I could only charge you $1.40 for that loan. It wouldn’t be worth me lending you the money, therefore you would not be getting to work, meaning you would loose your job, because I won’t risk $100 to make a dollar forty.
Annual Percentage Rates are based off, you guess it, Annually, yearly…not 2 weeks. Sure If I loaned you money for 2 years, a percentage cap would make sense. But not on a payday or short term loan. The banks are not going to lend money to these people who need help, therefore the people won’t get help. By the way for every 10 loans a loan company makes at least 10% of the borrowers don’t re-pay the loan…meaning if you made 10 $100 loans and charged $15 per loan you would expect to make $150 but if only 1 person did not repay the loan the company makes $35 for those 10 loans.
In other words, rate caps don’t work on loans less than $2,000 and terms less than 1 year and the people who need these loans (working families, and/or poor credit, and/or no bank account, and/or no credit history) would not be able to obtain any kind of loan to meet their needs, as retail banks would reject them either based on their credits score or the small amount of the loan.
You are cutting off your hand to spite your face.
It’s sorta like payday lending – and yes, I think that APR is a right way to represent the interest rate on a two week loan.