• Refund Anticipation Loans (RALs) – The Facts

    It’s getting closer to tax refund time, only a few months away. Some interesting research (PDF) out on Refund Anticipation Loans (RALs) – what millions of the working public use to get advanced money. Defined more explicitly: Refund anticipation loans (RALs) are 1 to 2 week loans made by banks and tax preparers, secured by the taxpayer’s expected tax refunds. Some statistics.

    VOLUME: An estimated 8.7 million RALs were made in 2007, compared to 9 million in 2006, and a high of 12.4 million 2004.

    FEES: Consumers paid an estimated $833 million in RAL fees in 2007 to get quick cash for their refunds; this price tag decreased from $900 million in 2006 due in part to a price cut by H&R Block for about half its customers. In addition to RAL fees, consumers paid another estimate $68 million “application,” “administrative,” “e-filing,” “service bureau,” “transmission” or “processing” fees — an estimated 20% of RAL borrowers are charged this fee. The price of a typical RAL of $3,000 can range from $62 to $110.

    APR: The APRs for a typical RAL can range in the triple digits. H&R Block and JP Morgan Chase claim that their RALs carry an APR of 36%, but that calculation does not include the fee for the dummy bank account use to repay the RAL, which doubles the APR. Other tax preparers, such as Jackson Hewitt and Liberty Tax Service, offer high cost RALs with APRs in the triple digits. The effective APR for RALs based on a 10-day loan period ranges from 50% (for a loan of $10,000) to nearly 500% (for a loan of $300). The APR for a typical RAL of about $3,000 can be from 77% to 140%.

    LEGISLATION: The Second Circuit Court of Appeals issued a major decision hampering the ability of states to regulate RALs – holding that federal banking law preempted interest rates caps. The IRS has taken tentative steps toward RAL reform, researching whether it should limit RALs by restricting the tax information necessary to make the loans. As well, an IRS study found a significant correlation between RALs and “noncompliance” – RAL users are 27-36% more noncompliant than taxpayers who do not use a financial product.

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