Refund Advance Loans And Refund Anticipation Checks 101
Are you counting on your tax refund to pay off bills? You may need the cash before your refund arrives.
The IRS website states that typical refunds take less than 21 calendar days if you e-filed your return. However, if you are claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) your refund may be delayed further.
Tax preparers may offer a solution in the form of refund advance loans (RALs) and refund anticipation checks (RACs). What's the difference between the two, and is either one right for you?
Refund advance loans are just what they sound like – a loan issued by a lender for the amount of your anticipated tax refund. You are loaned the money up front and your refund is used against the loan balance.
Predatory, older-style RALs were basically eliminated by rule changes in 2010 and 2012 due to high interest rates and other charges. Most present-day RALs are no-fee loans, although it's still possible for a RAL to include fees and interest.
New RALs are lower risk to borrowers. You no longer have to pay back the difference if the actual refund is less than the tax preparer anticipated. Even if the IRS garnishes your refund to cover other debts, you don't have to pay back the garnished amount. However, the cost of offering these loan terms may be recovered by higher payments for the initial tax preparation service. Make sure that you consider all costs before agreeing to a RAL.
Since a RAL is a loan, you must qualify just as you would with any other loan. Banks no longer get debt indicators from the IRS, increasing their risk under the new rules – they are on the hook if your refund is garnished. The lender may refuse to issue a RAL if the risk is high or your refund is too small to make a loan worth the lender's time and resources.
Unlike RALs, a refund anticipation check does not give you money before the IRS issues your refund. RACs streamline the process of getting your refund and allow you to delay paying tax preparation costs.
A RAC uses a temporary account opened by the tax preparer for your refund. The refund is direct-deposited in the account, and the preparer takes out fees for the RAC service (typically $30-$50) before you receive the refund from that account. Tax preparation fees are also deducted if the fees weren't paid up front. RACs are popular precisely for that reason – people who need help doing their taxes but can't afford preparation fees can use their refund to cover the charges.
Typically, you can receive your RAC-based refund via a prepaid card or a paper check, but again you must watch for charges. Look over the terms and conditions of the card to verify any expenses or fees associated with the card and look for surcharges associated with issuing a paper check.
When looking for a RAL/RAC provider, try to find someone who is honest and has integrity. Check your preparer's status with the Better Business Bureau and when using a chain tax preparer, search for online reviews for your local tax preparer's office.
Remember that if you electronically file your own taxes and have your refund direct-deposited into an account, you can expedite the refund process without using a RAL or RAC at all. It won't be a same-day transaction – but do you really need one? You may have better ways to address cash flow, such as transferring old credit card debt to a balance transfer card.
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