Published: January 2008

Avoid Tax Refund Loans Even With Improvements

Consumer advocates warn taxpayers to steer clear of Refund Anticipation Loans this tax season even with some limited improvement in these products.

National Consumer Law Center (NCLC) and Consumer Federation of America are calling Refund Anticipation Loans (RALs) one of the most avoidable tax time expenses.  Advocates warn that RALs are still a bad deal and urge consumers to steer clear of this unnecesary expense.

New figures reveal that RALs drained the refunds of nearly 9 million American taxpayers in 2006.  This figure has declined from a high of 12.4 million in 2004, but still represents $900 million in loan fees, plus over $90 million in other fees.

RALs are bank loans secured by the taxpayer’s expected refund -- loans that last about 7-14 days until the actual IRS refund repays the loan. That’s the first indicator of just how unnecessary most RALs are: Most taxpayers could have their refund in two weeks or less even without the costly loan.

“For a free quick refund, file electronically and have your refund direct deposited to your own bank account,” says Jean Ann Fox, Director of Financial Services for CFA, “You’ll generally receive an e-filed, direct deposit refund within 8 to 15 days.”

Using the most recent data available from the IRS, NCLC and CFA calculate that approximately 9 million taxpayers received RALs in the 2006 tax filing season (for tax year 2005).  For that year alone, about 1 in 14 tax returns involved a RAL. 

The price of a RAL includes several components –
· A loan fee ranging from $32 to $130, which is usually broken down into a “Refund Account” fee and a “Bank Fee.”
· A separate fee charged by the tax preparer, often called an “application” or “processing” fee, of about $40.  This fee is not charged by H&R Block.  Jackson Hewitt does not charge the fee in its company-owned stores, but some franchisees might charge a fee.

In general, the effective annual interest rate (APR) for a RAL can range from about 50% to nearly 500%.  If application fees are charged and included in the calculation, the effective APRs range from about 80% to nearly 1,200%.

Block and JPMorgan Chase have lowered their RAL fees, claiming that these loans bear an effective APR of 36%, which is the traditional small loan rate cap in many states.  However, these figures do not include the “Refund Account” fee, which they claim is for the temporary account into which the taxpayer’s refund is later deposited to repay the RAL.  If the Refund Account Fee is included, it more than doubles the APR.

Nonetheless, Block and JPMorgan’s price reductions do represent a real and significant reduction in cost to consumers.  For example, a RAL in the amount of $2,600, which is the average refund, costs from $57.85 to $110.  Taxpayers should avoid RALs in the first place; but if they insist on getting one, they should shop around.

For More Information

Consumer Federation of America or National Consumer Law Center

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