Refund Anticipation Loans

What are RALs?
Refund Anticipation Loans, or RALs, are not quick or instant refunds!  They are extremely high-cost bank loans secured by the taxpayer’s expected tax refund.  The loans last about 7-14 days until the actual IRS refund repays the loan.

Fast Facts
•    Approximately 12.38 million American taxpayers spent an unnecessary $1.6 billion in 2004 RALs.

•    Nationwide, in the 2004 tax filing season (for tax year 2003), 1 in 10 tax returns involved a RAL.

How are these loans made and who makes them?
Professional tax preparers like H&R Block and Jackson Hewitt as well as thousands of small independent preparers essentially broker these loans on behalf of insured financial institutions such as HSBC and Santa Barbara Bank and Trust (SBBT).

•    In 2003, HSBC/Household made 7.7 million RALs.  In late 2002, HSBC had 62% of the RAL marketplace.

•    In 2003, SBBT reported 1.53 million RALs.  Approximately 30% of SBBT’s pre-tax earnings come from RALs and refund anticipation checks.

Why are RALs risky or dangerous?

Sometimes the commercial tax preparer overestimates or makes a mistake when calculating the amount of the refund.  A taxpayer must repay the RAL regardless of whether the refund is denied, is smaller than expected, or frozen (something that the National Taxpayer Advocate has noted happens to hundreds of thousands of taxpayers, particularly EITC recipients).

If the taxpayer cannot pay back the RAL, the lender may send the account to a debt collector. The unpaid RAL can also affect a person’s credit rating.  If the taxpayer applies for a RAL from a commercial preparer the next year, that refund gets grabbed to repay the current year’s unpaid RAL debt.

Who gets RALs?

Commercial tax preparers target working families that claim the Earned Income Tax Credit (EITC). High RAL fees essentially undermine the EITC mission of assisting low-wage workers increase their income.

•    Nationwide, more than 56% of all RAL borrowers are EITC recipients according to 2004 IRS data (EITC recipients only make up 17% of taxpayers).

•    Furthermore, one out of every three EITC recipients gets a RAL. 

•    In 2004, EITC recipients spent $700 million on RALs. 

•    45% of these EITC recipients spent an additional $205 million to either cash their refund or loan check.

•    RALs borrowers are 2 times more like to be unbanked

•    Based on IRS data for 2002, approximately 550,000 taxpayers in California received their refunds in the form of a RAL, which cost these consumers as much as $122 million in loan and tax preparation fees.

•    Approximately 27% of H&R Block’s customers received RALs in 2004.  Furthermore, Block serves approximately 27% of the nation’s unbanked households.

What do RALs cost?

•    Loan fees cost from $29 to $120.

•    Some tax preparers also charge an “administrative” or “application” fee.

•    Tax preparers and their bank partners also offer an “instant” same day RAL for an extra $20 to $39.

•    The effective annual interest rate (APR) for a RAL can range from about 40% (for a loan of $9,999) to over 700% (for a loan of $200).

•    If administrative fees are charged and included in the calculation, RALs cost about 70% to over 1,800% APR.

•    For the 2005 tax season, a RAL for the average refund of around $2,150 will cost about $100.  This loan has an APR of
about 178%. If the taxpayer goes to a preparer who charges an additional $30 administrative fee, the APR would be 235%. The tax preparation fees average $146.  The total cost for the loan, administrative fees and tax preparation fess would be $276.  (13% of the total refund amount)