Refund Anticipation Loans

What is a Refund Anticipation Loan (RAL)?

 

A Refund Anticipation Loan is a high-interest short-term loan secured by a taxpayer’s expected tax refund.  A taxpayer commonly applies for the loan through a tax preparation firm.  The taxpayer receives an amount up to the refund amount less the loan fee, tax preparation, and other fees.  The proceeds of the loan may be paid by check, deposited in a bank account, or disbursed through a prepaid cash card, within one to three days of filing the tax return.  The taxpayer’s refund then normally repays the refund anticipation loan amount.

 

 

Does that sound like a good plan to you?  Well, I guess it all depends upon whom you ask.  Suzy Q or Joe Sixpack walks into their local tax preparation place and tells the person, “Here is my W-2 I need a loan.”  The tax place takes a look at some IRS Website to make sure they are not on some IRS Debt List and away they go.  After all the i’s are dotted and t’s are crossed, Suzy or Joe has there refund in about 1 – 3 days.  Let’s look at this transaction from a pure cost of funds perspective. 

 

 

Let’s take a more modest RAL and see what your paying in interest for that loan.  You have agreed to pay a standard 3.5% fee for the loan.  Now realize that you are paying a 3.5% loan on the amount of the anticipation.  No matter what the loan refund amount that is the amount you pay in this scenario.  Remember why you are getting the loan in the first place from this service provider.  You need you money the next day instead of 10 – 12 days later, the time it takes for the government to refund your money electronically without a fee.  So what is this loans APR for the terms and conditions of this loan?

 

 

Okay to figure this out involves going back to that dreaded thing from high school or college called math. – YUCK!!!

 

 

So to put this fee into an APR you have compare the cost of receiving the funds in one day vs. waiting the ten to twelve.  So let’s use 12 days as the difference.  Well to figure out a yearly rate we ask ourselves how many 11 day periods (because we subtracted 1 from 12) are there in one year.  That answer would be 33.2.  Now we take that number and multiply it by the fee of 3.5% to get our APR. (33.2 * .035 = 1.16)  Wow, we were charged a 116% APR for that loan. 

Now you have a template to use to figure out how a fee is annualized into a yearly APR.  Does your head hurt yet?  Mine always does after a math word problem.  There is probably another way to figure out that number mathmatically, but hey I am not a mathametician.

 

 

My first point is that you need to think about how much that loan is really costing you when you put it into terms that most people can relate to, an APR.  My second point would be this one. I am not about to get on a financial high horse and tell folks that they are just wasting their money by doing a RAL.  Bet I surprised a bunch of my regular readers.  If you are in dire need of quick cash and this loan determines whether or not your in the street or feeding your family, then by all means get the loan any way you can.  RAL places would not be around if they were not used by millions of people each year.  I would like though for people to think about whether or not to use these places for a quick refund to purchase a financial “want”. Delay the insatnt gratification syndrom and wait the extra eleven days and get back more money.

 

 

Your thoughts???

 

 

-Phillip