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The "Tax Refund" That Really Isn't
One: It's a Refund Anticipation Loan
How would you like to pay a super-high
price to borrow money that already belongs
to you? Sounds ridiculous, right? But that's
pretty much what happens to many folks at
tax time in the crazy world of RALs, or refund
anticipation loans.
You may be tempted by tax-time advertisements
for "Fast Cash Refunds," "Express
Money," or "Instant Refunds." These ads
will offer to get you your refund in just a
day or two, or even on the spot. Beware!
Many of these "fast refunds" are really
LOANS, refund anticipation loans.
When you get a RAL, you're borrowing
against your own tax refund money. And
RALs are often marketed to people who
need money the most ? low- and moderate-
income workers who receive the Earned
Income Tax Credit.
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Don't Pay Triple-Digit Interest
Rates to Borrow Your Own Refund
RALs are extremely expensive. Loan fees typically range from $30 to $90, which translates into Annual Percentage Rates (APRs) of about 60% to over 700%. If you paid those rates on all your borrowing you'd probably go broke! And all to get your tax refund just a few days earlier than you can for free from the IRS. You're lining someone else's pockets with YOUR hard-earned money! RAL fees, combined with tax preparation, electronic filing, and other fees, can end up eating away a big chunk of your refund.
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Example: |
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For a tax refund of $2000, you might pay to get a RAL: |
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RAL loan fee: |
$75 |
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Electronic filing fee: |
$40 |
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Combine that with the fee you will need |
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to pay to the tax preparer: |
$100 |
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Total: |
$215 |
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This is over 10% of your refund! |
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This RAL has an APR (Annual Percentage Rate) of 142% |
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if it beats the IRS by 10 days. |
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RALs Can Be Hazardous to Your Financial Health
In addition to their high costs, RALs can be
risky. Since a RAL is a loan from a bank in
partnership with a tax preparer, it must be
repaid even if the IRS denies or delays your
refund, or your refund is smaller than expected.
If you don't pay back the RAL, the
lender will take actions to hurt your credit
rating and may send your account to a debt
collector. In addition, when you apply for a
RAL, you are giving the lender the right to
grab your tax refund to pay for old tax loan
debts that the lender claims you owe.
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