What is a Refund Anticipation Loan (RAL)?

It’s a high-cost, short-term loan marketed aggressively during tax time by paid tax preparation firms.

When you get a RAL, you’re not obtaining your money from the IRS instantly - you’re paying big bucks to receive cash up front until the IRS repays the institution from which you obtained the loan. Typically, the interest and fees that are charged take a big bite out of the expected refund.

RAL Facts

• The effective annual interest rate (APR) for a RAL, based on a 10 day loan, can range from 70% to more than 700%.

• Some RALs charge additional administrative fees for faster service, resulting in costs ranging between 70 and 1,700% APR. RALs can drain hundreds of dollars from a typical refund.

• RALs siphon away the tax benefit low-income filers should receive by claiming the Earned Income Tax Credit (EITC); as much as $14.3 million in this benefit was lost in 2005 in Wisconsin to RALs.

• According to the most recent data, about 1 in 13 taxpayers (around 9.6 million Americans) took out RALs in 2005 that drained their wallets of more than $960 million in loan fees, plus $100 million in other fees.

• Local economies also suffer when tax dollars are diverted due to a an economic “multiplier” effect: The estimated $6.1 million in RAL fees by federal EITC recipients in Milwaukee in 2005, for example, denied the city of as much as $17.4 million in economic activity that could have resulted had consumers been spared those costs.

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