How much are you willing to pay to borrow money for 14 days? If you’re reading this blog, probably not much. You’re probably in the anti-payday loan store camp and you probably believe effectively managing revolving debt is part of a frugal lifestyle.
What you may not know is that you’re going against your convictions and better thinking by using a Refund Anticipation Loan (RAL). An RAL is a short-term loan secured by a taxpayer’s expected tax refund and is designed to offer customers quicker access to funds than waiting for their tax refund. They’re popular with the common tax preparers – H&R Block promotes them heavily. The pitfall: the fees, though seemingly reasonable, act as an irrationally high interest rate. It is estimated that 12.38 million RALs were issued in 2004 alone.
Here’s the math:
Based upon the prices for RALs in 2006, a consumer can expect to pay about $100 in order to get a RAL for the average refund of about $2,150 from a commercial tax preparation chain. That amounts to an interest rate of 4.65%. If you file your return electronically with direct deposit, you would like expect your refund to be received within 10-14 days. With compounding, that 14 day interest rate becomes an effective annualized interest rate of 227%.
So though it may seem the $100 fee is simply part of your tax preparation costs, it is really a short-term outrageously priced loan not unlike a payday loan store and far worse than even the highest priced credit cards. Our tip: be patient and avoid Tax Refund Loans or Refund Anticipation Loans, period.
Source: Consumer Federation of America
