It’s Tax Time!
Depending on what kind of tax bill you are anticipating, you fall into one of two camps: those who will have to pay, and will thus put off filing for as long as you can, or those who will receive a refund. For those folks, you can’t possibly file fast enough, and that refund – no matter how fast it arrives – is still too slow.
Some people have come to depend on that annual tax refund as much as they do a paycheck. In many cases, the money is spent (or promised) before it ever touches the person’s bank. A difference of a few days could have consequences, causing financial trouble if that refund check is delayed.
Which is why, many years ago, something was invented to address the problem: Refund Anticipation Loans, or Refund Anticipation Checks (which is becoming more common now that tax preparers don’t want you to think of it as applying for a loan… which you are)
But the real question is – are these refund advances a legitimate service you can count on, or are they a glorified scam?
A Brief History of the Refund Anticipation Loan (RAL)
Before the 1980s, there was no electronic tax filing, and no refund anticipation system. You filled out the forms, mailed them in, and waited for a hard check to be delivered by the post. There were no other options.
Once e-filing began, tax preparers began rolling out programs to get their clients a tax return within 24 hours. They did this not by magic, but by essentially giving each client a loan, using the impending tax return as collateral. The client would pay a refund fee (in addition to paying for the preparation of the tax return), and be “given” their refund money, which was a loan that was repaid by the preparer keeping the tax refund when it arrived.
It didn’t take long for people to start gaming the system, and by 1994 the IRS advised against the practice. But the idea had been floated, and people liked the idea of not waiting for their money, so Refund Anticipation continued. Not only through tax services, but also through major banks, credit unions, and even some seasonal businesses that only existed during tax time to provide this service.
Federally regulated financial institutions were forced by federal regulators to stop issuing Refund Anticipation Loans in 2012. That meant a great deal of known and trusted establishments were out of the RAL game.
Banks may be done with RALs, but Americans still want them, and they are as popular as ever.
Should You Use a Refund Anticipation Loan?
This kind of loan, not unlike a payday loan, is basically just a short-term loan with higher APR than a bank would charge. As with payday loans, Refund Anticipation Loans are widely maligned and viewed as scams or rip-offs.
But the truth of the matter is that there is nothing inherently sneaky about a RAL. You agree to terms, pay what you need to pay, get your refund early, and move on, right? In theory, that’s how it always works, but you need to very cautious about where you got for this loan.
The three largest tax preparation companies in America all offer their versions of a refund advance. These are considered the safest places to go for your RAL, as they are established national companies with long histories. Small independent tax preparers also often offer these loans, but the veracity of these companies would need to be verified on an individual basis. Finally, many payday loan companies also offer these kind of loans. These lenders usually are in business year round, but only offer RALs during tax season.
Do your research, find out if the tax company is reputable, and what the terms are for the refund advance. A refund advance is just a tool… but make sure you know who is holding that tool before you ask them to use it!