Tax Season is upon us! It seems like just a week or two ago that we were enjoying Christmas dinner with family and friends. But now, it’s time to crunch numbers again, and we long for the day when that sweet little refund check comes in the mail.
But you don’t necessarily have to wait anymore. You could get a refund anticipation loan.
RALs are offered by lenders who promise to deliver all of the money from your return to you now, without waiting.
If it sounds too good to be true, it probably is. Momma was right.
There is no fancy financial time machine. These RALs are not offered through legitimate tax preparation companies; tax prep solutions of this nature are called Refund Advances, and are backed by the trust and capability of your favorite tax preparation company. RALs, on the other hand, are offered through other avenues, and the terms are often harsher, which is not worth it on the tail end of things.
Basically, the closest comparison to a RAL is any other cash advance. The lender looks at the amount you are expected to get from the government on your tax refund, and then they issue you a short-term loan based on that hypothetical figure. Essentially, when your refund does come in, you are expected to use that money to pay off your RAL in full.
However, some lenders skyrocket the interest rate on your RAL, sometimes in the level of payday loans. There was a couple from New Mexico who, in 2014, took out a RAL of $1,250. They ended up being charged nearly 400% interest on that loan. They are not the only family to experience this hassle, but they have been in the news since early 2015 because they are waging a legal fight to end this usury before more families can be harmed.
Additionally, some lenders are offering RALs with extra “fees” on top of the interest itself. Essentially, you could be expecting somewhere around $5,000 on your refund, but if you choose to take out a RAL, you may only be offered a short-term loan of $1,500, with another $1,700 in fees….
You probably have enough common sense to know that a storefront or popup lender would be a bad choice for an RAL; but what about some of the legitimate, big-name tax preparation companies? H&R Block and Jackson Hewitt offer RALs to clients with no fees or interest. The question becomes, is it a bad idea to take an RAL from one of these companies?
When making your decision, it is important to understand that “fee free” or “zero percent APR” are not actually “free.” To qualify for an RAL, you have to pay the company to prepare your taxes for you. Depending on how complicated your returns are, you could be spending upwards of several hundred bucks. This won’t be paid up front, but it comes out of your refund on the back end. So, if you file your taxes on your own, you could stand to receive much more when your check arrives, rather than losing a huge chunk of it before you ever even see a single dime.
Let’s not even consider that your refund “anticipation” loan may not add up to the real amount you end up receiving. What happens if you file with a tax prep company, and they issue you an RAL for $3,000, and then your actual refund amount is only $2,000?
The State of Wisconsin Department of Revenue issued a statement to address this issue: “If the refund is smaller than anticipated due to deductions for items like unpaid child support or traffic tickets, the full amount of the loan must still be repaid.”
In other words, you have to fork up the difference.
· File your own taxes, and do it ASAP. Credit Karma offers free tax preparation, as well as internal filing that requires no extra paperwork on your part or trips to the post office.
· You can also set up your refund to process through direct deposit. This means you could see your refund in as little as 10 to 21 days of filing, rather than upwards of a month.
And if you still need a short term loan, Wise Loan is here for you! Give us a call today.
We are not financial advisors and therefor are not giving any financial advise. Before implementing any of the tips on this website, please consult with a financial planner to ensure it makes sense for your individual financial situation.