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Tax Refund Anticipation Loans (RALs) - Why Rapid Refunds Cost You

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    Tax Refund Anticipation Loans (RALs) - Why Rapid Refunds Cost You

    On the surface they seem like a harmless and convenient idea. You know you'll be getting a refund from the Internal Revenue Service (IRS) for your taxes in a couple of weeks, so why not get it immediately? Thus some 12 million tax payers opted to for a tax refund anticipation or rapid refund loan in 2003. While convenient, they are anything but good for your finances.

    Tax refund anticipation loans (often referred to as RALs) are short term loans offered by commercial tax preparation services to those who are going to receive a tax refund. The problem is that these short term loans are at extremely high interest rates - usually at more times maximum credit card interest rates - and can be as high as 700% APR. Even worse, you are paying these outrageous rates for your own money.

    While these loans typically get you a refund immediately, they don't save you a whole lot of time. The loan is secured with the money from the anticipated tax refund and usually last about 10 days. Because the term is so short and the interest charged so high, consumer rights groups view these loans as predatory and say they cost the working poor more than $500 million a year.

    When you think about it, these refund anticipation loans don't make much financial sense. The reason that you are receiving the income tax refund in the first place is because you have been loaning the money to the government for the entire year at no charge. After letting the government use this money for free, you pay triple digit interest rate fees to get your own money a few weeks earlier at most.

    There are a number of alternatives that will get you your money quickly without costing you anything in the process. Probably the best financial move would be to go to your personnel department and adjust your W-2 income tax withholding. This will give you more money in each of your paychecks throughout the year and means you aren't giving the government a free loan of your money until you file your tax return.

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    Since changing your W-2 income tax withholding won't help with your tax return this year, you still can get your tax refund in a timely manner by filing your tax return electronically. With the <A HREF="http://www.savingadvice.com/forums/showthread.php?t=4191">IRS Free File Program</A>, a number of tax services offer free tax preparation and electronic filing to anyone, so there isn't any reason to do your taxes by hand. Filing electronically should decrease the time for your to receive your income tax refund in half.

    To speed up your income tax refund even further, consider having the refund direct deposited into your bank. Opting for the direct deposit distribution should place your income tax refund into your bank account in about 10 days after filing. Even for those who choose to file the old fashioned paper and snail-mail way will find they receive their refund check quicker when opting for a direct deposit. In addition to getting the money faster, it also gives protection against lost or stolen refund checks that sometimes occur when redund checks are sent by regular mail.

    If the reason that you want the rapid refund is to buy a large appliance of some type, consider taking out a loan with the store since their rates are likely to be much better. A large number of stores offer free financing for a limited time around tax season for just this purpose. By the time the free financing term ends, you'll usually already have received your income tax refund. Even if you haven't and you have to pay a month of interest, the interest on the appliance loan will still likely be much better and you'll save a significant amount of money over getting the refund anticipation loan.

    Having the patience to wait a week or two longer for your income tax refund check will save you plenty of money to make the wait worth the while.
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