Refund anticipation loans

Refund anticipation loan (RAL) is a short-term consumer loan in the United States provided by a third party against an expected tax refund for the duration it takes the tax authority to pay the refund. The loan term was usually about two to three weeks, related to the time it took the U.S. Internal Revenue Service to deposit refunds in electronic accounts. The loans were designed to make the refund available in as little as 24 hours. They were secured by a taxpayer’s expected tax refund, and designed to offer customers quicker access to funds.

The costs to the borrower could be significant compared to other lending and some consumer organizations warned consumers of the risk involved in this type of loan. They are a largely discontinued financial product and beginning with the 2013 tax filing season, they have been largely replaced with the similar refund anticipation checks (RAC), as well as a hodge podge of other financial products.

RACs are temporary accounts which wait for the client's IRS tax refund, and which also provides a way for the client to pay for tax preparation out of the refund. Both financial products have similar fees and similar risks of third-party bank "cross-collection".

A similar process in Canada to a RAL is termed "tax rebate discounting".

In the United States prior to the 2013 tax filing season, taxpayers could apply for a refund anticipation loan through a paid professional tax preparation service, where a fee is typically charged for the preparation of the tax return. Internal Revenue Service rules prohibit basing this fee on the amount of the expected refund. An additional fee was usually charged for the services of originating a bank product and establishing a short-term bank account. By law this fee must be the same on both loan and non-loan bank products, and in 2004 the average fee was $32. The bank through which the loan was made charges finance charges.

According to the National Consumer Law Center, 12 million taxpayers used a RAL in 2004. With e-filing and IRS partnerships that help consumers e-file for free, U.S. taxpayers can generally receive their tax refunds within three weeks and sometimes as quickly as ten to fourteen days if they choose to receive their refund via direct deposit. As of 2017, 70% of US taxpayers have access to free e-file and tax preparation services. This rendered RALs less attractive to some.

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Wikipedia