Tax season brings with it a variety of headaches, but there is one that can be especially costly for consumers: refund anticipation loans, or RALs.
These loans, typically used by low-income consumers who lack bank accounts, provide filers with quick money, taken out as an advance against their expected refund amount. They often carry annualized interest rates in excess of 30 percent, and sometimes as high as 500 percent. Many consumer advocates say they are so expensive that they should never be used.
"I absolutely think that they should be illegal," says Sally Greenberg, executive director of the National Consumers League. "Invariably, the interest charged is extreme, and it's yet another example of taking money out of poor people's pockets and robbing them of scarce funds."
According to a report released last week by the National Consumer Law Center and Consumer Federation of America, 9 million Americans, or 6.2 percent of taxpayers, took out RALs in 2006 and paid a total of $900 million in loan fees. That represents a decline from a high of 12.4 million taxpayers in 2004, but the organizations say the change might reflect better data, not an actual reduction in use.
The loans are offered by banks through tax preparation services. Jackson Hewitt, which declined to say how many RALs it helped arrange last year, works with banks that charge around $95 in finance and account fees for a $2,600 refund anticipation loan, for example. Sheila Cort, spokeswoman for Jackson Hewitt, says the company discloses the fees to customers in a variety of ways, including the recent addition of a watermark on every page of RAL applications that says, "RAL is a loan."
H&R Block offers a $3,000 refund anticipation loan for around $62, including the account fee and finance charge. The company, which handled 3.85 million RALs last year, says that it advises clients that the fastest and cheapest way to get their refund is to file their taxes electronically and have the refund deposited directly into their account, which usually takes about 10 days.
But many consumers—according to the research firm Packaged Facts, as many as 28 million of them—lack bank accounts. H&R Block spokesman Dan Smith says that 40 percent of the company's clients who chose a RAL last year did not have a bank account, which means they would have had to wait three to six weeks for their refund checks to arrive by mail. "Many taxpayers face urgent financial needs, such as paying bills or emergency expenses, and want their money as soon as possible," he says.
"The main reason people take [RALs] out is that they get their money sooner," says Lynne Strang, spokeswoman for the American Financial Services Association, an industry group.
Jean Ann Fox, director of financial services for the Consumer Federation of America, says that not only are RALs expensive but they're also risky. "You run the risk that some of your deductions will be disallowed or you won't get as much of a refund as you expected—and now you owe the bank," she says.
Greenberg recommends that taxpayers in need of quick money join a credit union, which would offer loans at reasonable interest rates.
In other tax-related news, the Internal Revenue Service has warned taxpayers of new E-mail scams circulating. People have reported receiving E-mails that say they are from the IRS and direct the recipient to a website, often to collect an alleged refund. But the IRS tells taxpayers not to be fooled: Generally, the agency does not initiate contacts with taxpayers through E-mail, says Nancy Mathis, spokeswoman for the IRS.
• Readers: Have you ever used a refund anticipation loan? What else is on your mind this tax season?