Guest Author - Rhonda Cliett
A Refund Anticipation Loan (RAL) goes by many names including Quick Tax Loan and Instant Tax Loan, but no matter the name, it will cost you a lot of money and could leave you in a severe financial bind.
There are many variations of tax refund loans. Some of the loans are based on your final year-end paystub and some are based on your W2. Each of these loans promise to give you your tax refund (or your anticipated tax refund) now versus later. In a society of instant gratification, many people jump at this opportunity without fully weighing the consequences.
Paystub Loans
The “paystub” loans are based on your anticipated tax refund. You show the participating tax preparer your paystub and they guess how much you will receive as your refund and then loan you that amount of money. One of the problems with this type of loan is that you pay a tax preparation fee along with loan fees which can equal a triple digit interest rate. Would you pay greater than 100% interest on a car loan? Hopefully not. So, why would you be willing to pay this on a tax refund loan?
The other problem with the “paystub” loan is that it is based on an “anticipated” amount. Let’s say the tax preparer guesses that your tax refund is $2000 so you receive a loan based on this amount (minus the fees). However, when the tax preparer actually prepares your return it is discovered that your actual refund is only $1000. At this time, your loan of $2000 is due and you only have $1000 coming from the IRS to cover the loan. If you spent the entire $2000 loan when you received it, you are now in trouble. How are you going to find the difference to cover the cost of the loan?
W2 Loan
A “W2” loan is a bit safer than the “paystub” loan because it is given at the time your tax return is prepared so the preparer doesn’t have to guess at the amount of your refund. So, why is this a bad deal? Once again, you must pay a tax preparation fee along with loan fees which can be quite substantial.
Best Alternative
The absolute best alternative for every taxpayer is to forget about the loans and instead receive their tax refund directly from the IRS. You might be pleasantly surprised at how quick the IRS will send you your refund. If you file your tax form electronically, your refund check will be issued within 3 weeks. If you file a paper tax form, your refund check will be issued within 6-8 weeks. The quickest way to get your tax refund is to file an electronic return and request your refund be direct deposited into your bank account. From my experience, most returns filed electronically with the direct deposit option, have the taxpayer receiving their refund within 1 ˝ to 2 weeks.
Remember, your tax refund is your money and you should receive all of it, not just a portion of it. Don’t fall victim to the tax loan lenders. Instead, select an option which allows you to receive all of your hard earned money.
Have a tax related question? If so, post it in the Home Finance Forum
