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RALs are still around, but be sure they're worth the cost

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Money troubles lead some taxpayers to refund anticipation loans. If you're not careful, it could make finances worse.

When the Internal Revenue Service officially opens the 2023 tax filing season, which is expected to be at near the end of the month (it was Jan. 24 last year), it will process e-filed 1040s first.

Those returns' electronic data automatically goes into the IRS processing system. That means, says the agency, most of those early filers should get their refunds within 21 days.

But what if you just can't wait three weeks for the tax cash?

Or you know your refund will be even later because you're one of the millions who claims the Earned Income Tax Credit and/or Additional CTC. The IRS is legally required to hold off processing returns with those credits until Feb. 15, meaning early March is the soonest those refunds are issued.

In these cases, some people opt for a refund advance loan, or RAL.

Easing of worst practices: Yes, RALs are still around. This quicker tax cash option gets filers at least some of their expected federal tax refund as a short-term loan.

The IRS did crack down on RALs (and the agency's own inadvertent condoning of them) back in 2010, leading most banks that issued them to abandon the loans. Other bank and tax regulations also ended most of the particularly egregious fees associated with RAL.

Now pre-refund loans are primarily offered by tax preparation services, which means RALs still have tax preparation fees, and possibly other charges, deducted from the amount the taxpayer gets.

But as the loans' continued existence indicates, there's still a market for them.

Why? Because the need and/or desire for fast tax refund money has deeper, more troublesome financial roots.

Financial weaknesses underscore RAL needs: Even before the COVID-19 pandemic disrupted the U.S. economy, forcing many to turn to multiple income streams, lots of folks already were working two or more jobs to make ends meet.

These overloaded workers also can't afford many of the financial trappings that many of us take for granted.

They don't have bank accounts, into which the IRS could directly deposit refunds sooner, because of financial institution's fees. They don't have emergency savings because just paying the rent and buying groceries is a day-to-day struggle.

And they tend to use the Federal Bank of Uncle Sam as a way to save. They intentionally overwithhold income taxes throughout the year so they can get a big refund each filing season.

I'm not here to judge or preach, but that tactic backfired spectacularly during the pandemic. The IRS got so backlogged in processing returns that some people had to wait literally a year before they got their tax refunds.

These folks living on the financial edge are examples of when real life meets tax refund loans.

Checking out RAL offerings: If, however, you do find that you just can't wait for your tax refund, compare the loan programs offered by various tax services. You want to get the answers to such things as —

  • How much of an advance loan is available? It varies among RAL offers, but most rely on your expected tax refund amount. However, even in a best-case scenario and before fees are subtracted, you won't be able to get, for example, all the of $2,000 you're expecting back from the IRS.
  • What is the actual RAL interest rate, when expressed as the commonly referenced annual percentage rate (APR)? In some cases, what looks like a good deal could actually be triple-digit rate.
  • How quickly will you get your tax advance money? Some aren't issued until the IRS accepts your return.
  • How will the RAL be dispersed? Some issuers require you to open a special account, often associated with the tax service, into which the loan amount will be deposited. Others put the money on a prepaid credit or debit card.
  • What is the tax service's fee that will be deducted from the RAL?
  • What other charges are connected to the preparation of your return? Also make sure you're clear on how they will affect your RAL amount.
  • What are RAL application requirements? Some providers say they don't need to check your credit. Others may charge more for a RAL if your credit score isn't at a certain level.
  • What happens if my IRS refund is less than the amount upon which the RAL was based? Since it's a loan, you'll be financially responsible for the full amount, regardless of whether your final tax refund is smaller or denied completely by the IRS.

If you can't get satisfactory responses from the RAL provider, or you don't like the answers, then don't get a RAL.

Remember, you are, after all, paying to borrow your own money

RACs vs. RALs: In looking for quick access to your refund, you also might see offers of refund anticipation checks (RACs). These similarly named (and acronymed) products are not the same.

RACs are temporary bank accounts that the tax service establishes on behalf of a taxpayer into which a refund can be received. You don't get the RAC funds until the IRS directly deposits the taxpayer's refund into the RAC account. Then you'll receive the refund amount minus fees for tax preparation and the cost of the product.

The only slim advantage of a RAC is that it provides a financial account where the IRS can directly send the funds, speeding up the refund process. But RAC users do not receive their money any earlier than other taxpayers who have a bank account that can be used for tax refund direct deposit.

Instead of losing some of your refund to RAC charges, open an account for tax refund direct deposit yourself.

The Federal Deposit Insurance Corporation's (FDIC's) Get Banked program offers an online guide to opening an account at one of its insured banks.

FDIC Get Banked graphic

The FDIC also has a checklist to help your use its online search tool BankFind. Other no- or low-cost online bank options can be found at —

If you prefer a credit union, the National Credit Union Administration website has its own credit union locator tool. You can search for a credit union by address or name, then pick one (or more) from the results to view more information.

And if you're considering a RAL simply because you want, not need, your refund sooner, check out instead some less costly alternatives.

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