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January 2012

Tax Refund Anticipation Loans and Checks


The lure of quick cash before you get your tax refund will cost you big money through high fees and hefty interest rates.  Fortunately, a refund anticipation loan (RAL), which is a loan borrowed against and secured by a taxpayer’s expected tax return, may be a thing of the past after this year.  That’s because the last bank still funding RALs has agreed to stop after this tax season, under a settlement with the Federal Deposit Insurance Corporation (FDIC).

Consider this before taking out a refund anticipation loan:

  • Fees An RAL can cost between $30 and well over $100, which translates to very high interest rates.  Additionally, tax preparers charge their own fees on top of those that the bank already charges, which can range from $25 to several hundred dollars.  In short, RALs charge taxpayers heavily for what ends up being nothing more than a pay advance of a few days.

  • Time saved?  Not much if you file electronically! Indeed, an RAL does not always provide faster access to tax return money than the IRS. For instance, it often takes two days or longer for an RAL recipient to receive a refund. Taxpayers with bank accounts generally obtain their refunds in just 8-15 days through e-filing and direct deposit. Even without a bank account, taxpayers can receive a fast refund by e-filing and having their refund deposited to a prepaid card. Most importantly, neither of these alternatives carries the costs and fees that an RAL does.           


Out with the RAL, in with the RAC-Both Charge Fees that Set You Back!
With the sunset of the RAL, there's a sunrise for another tax refund financial product called the refund anticipation check, or RAC. An RAC is a temporary bank account into which the IRS directly deposits the tax refund. Once the IRS deposits the tax refund, the tax preparer draws a check for the consumer and then closes the account. Tax preparers charge fees for this service, although the cost is generally less than RAL fees. Consumers may also have to pay additional fees to cash the check. You can avoid these fees by opening a checking account and having the IRS direct-deposit your tax refund.

The U.S. Department of the Treasury encourages current and potential payroll card users to direct deposit their federal tax refund onto existing payroll cards. Some workers use payroll cards to receive and access their wages, often because they do not have bank accounts. The tax refund direct deposit onto a payroll card is safe and convenient.

Volunteer Income Tax Assistance (VITA)
You can seek free income tax preparation assistance through the Volunteer Income Tax Assistance (VITA) program. VITA is designed to assist low and moderate income individuals and families along with the elderly and handicapped. For more information or to locate the VITA site in Iowa nearest you, call the VITA site locator number at 1-800-906-9887, or go to the www.IRS.gov website and type the search term "VITA."

To file a complaint or get more information, contact the Iowa Attorney General's Consumer Protection Division, Hoover Bldg., Des Moines, IA 50319. Call 515-281-5926, or outside Des Moines call toll-free at 1-888-777-4590. Our website is: www.IowaAttorneyGeneral.gov.


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