During tax season, many people need help preparing their taxes. Some of these tax preparation services also offer ways to receive your refund faster via RALs and RACs. RALs, or Refund Anticipation Loans, are short-term, high-risk, high-cost loans, usually 1-2 weeks in duration. These loans are secured by your tax refund and include costly fees and high interest rates, which reduce the overall amount of your refund unnecessarily.
High fees for RALs translate into very high annual percentage rates (APRs)—sometimes into the triple digits. An APR is the rate of a loan or line of credit when all of the additional fees that you pay are added to the principle and interest you will pay over the life of the loan. The APR is designed to give consumers a better tool for comparing loans between lenders because fees will vary from lender to lender. The example in our infographic (located to the right) shows a RAL with an extremely high APR of 355%. Because of the high fees associated with RAL loans, you expose yourself to the added risk of debt if your tax refund is not as much as expected.
Historically, these loans target low-income taxpayers, who receive earned income tax credits (EITC) and use the RAL to pay for tax preparation fees. Over the past few years, RALs have seen a decline in usage. The elimination in 2011 of the IRS-provided Debt Indicator, which is used to facilitate RALs, has had a large impact on financial institutions that provided these loans. Tax preparers now have no way of knowing if your refund will be intercepted for payment of other debts, and the FDIC has declared RALs as “high-risk.” As a result, RALs are losing their popularity and only a few institutions still offer these loans.
Refund Anticipation Checks (RACs) are another tool these institutions offer as a way to get “faster” access to the money from your return. These also have very high fees and target taxpayers who cannot afford to pay for tax preparation services out of pocket, and may not have a traditional bank account. Debit cards associated with RACs are marketed for their convenience; however, they often have additional transaction and cash withdrawal fees.
An option that many are unaware of, however, is that of low-interest loans. Credit unions and other community organizations often offer short-term loans at competitive rates. These small, low-interest loans lend themselves toward a manageable repayment schedule, which can usually be adjusted to fit your ability.
Another option would be to use a volunteer tax preparation service such as VITA, which helps both families and individuals complete their taxes free of charge. According to Sheryl Sculley, San Antonio city manager, “VITA saved San Antonio taxpayers an estimated $6.3 million in tax preparation fees in 2009.” You can find more details about how to qualify for this free service here.
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