Thursday, December 04, 2008

Better Things Come To Those Who Wait-Avoid Tax Refund Anticipation Loans

The holiday season is in full swing and before we know it we will be ushering in a new year. After the excitement of ringing in the New Year on January 1st, many people turn their attention to the upcoming tax season. If you are one of the millions of Americans who is anxiously awaiting a tax refund to stimulate your own economic situation, you may be tempted to rush that payment from Uncle Sam by taking advantage of a tax anticipation loan. However in the world of high interest loans, this one is almost at the top of the scale, comparable to payday loans since they are often targeted toward the working poor who really can't afford to lose another dollar.

What is a Refund Anticipation Loan (RAL)?
Basically a RAL is a third party loan offered by your tax preparer in order for you to receive you tax refund quickly. The reason this type of loan appears predatory in nature is the fact that unlike years ago when you had up to several weeks to receive you return via mail, most refunds presently can be received in as little as a few days up to two weeks. For some people who are desperately waiting for cash to pay bills or cover living expenses, the need for money will tempt them to accept an offer of receiving their cash almost immediately, but for that “convenience” they can expect to pay up to triple digits in interest rates for an extremely short term loan. Unlike payday loans (short term loans advanced to anyone having a checking account and a job) which are considered high risk, RAL loans are very low risk. You don't have to pay cash up front and all the fees are taken out of the refund which is guaranteed money as long as your taxes are filed correctly and you do not have any outstanding debts that may result in a deduction from your refund.

Who are the players in this loan game?
Tax preparers make up the large majority of businesses offering RALs, however they are not alone. Are you looking for another car or perhaps a new big screen TV? Many vendors offer incentives that include using your pending tax return in exchange for big ticket items. They prey on individuals that are looking for or are in need of money immediately. Anyone expecting a refund from the IRS can qualify for this type of advance. Most individuals that accept a RAL qualify for the low income Earned Income Tax Credit (EITC). Sadly, many of the individuals don't even realize that they are taking out a “loan” and either through misrepresentation or simply by not understanding the terms, think the process is part of their tax preparation. EITC qualifying families make up over half of the people receiving RALs from commercial tax preparers.

Alternatives to RALs?
Does it make sense to pay to borrow your own money? The resounding answer is NO! There are few cases where having the money just a few days earlier is worth the cost. The best alternative to get you cash quickly is to file your tax return electronically and opt to have the refund deposited directly into your checking or savings account. If you need assistance preparing your taxes, consider using the free tax preparation service through the IRS. The Volunteer Income Tax Assistance Program (VITA) offers free tax help for moderate to low income taxpayers (earning $40,000 or less) who would otherwise normally use commercial tax preparers for their tax returns.

Unlike the trillions of dollars the government is currently handing out in the form of bailouts, your income tax return is not money being given to you for free. It is money that you worked hard to earn that the government has been nice enough to hold for you in. You've waited all year for this cash. The high interest expenses of RALs really are not worth the cost to receive your money days earlier.

Trisha Wagner is a freelance writer for, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

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