Every year, about half of Americans overpay their federal income tax and are issued a tax refund. Even if you file electronically and use the best tax software you don’t get your refund immediately after filing your taxes. It could take a few weeks to get the money in your account or to get a refund check in the mail.
Scrupulous tax preparation companies will offer a “service” to their customers. It’s called a cash refund anticipation loan (RAL). The tax prep company will give you your refund immediately in cash (minus some fees). Then when your tax refund comes in, they’ll keep all of it.
A RAL is a predatory lending practice. It is targeted to the poor, since they are the ones who would need the cash instantly rather than wait for their refund. It is also targeted to the poor because they are less likely to have a bank account for a direct deposit of their refund.
These income tax refund anticipation loans also come with a high interest rate. On a typical RAL your tax refund of $2,000 could be charged well over $100 in fees, all for just getting your own money about 10 days quick. It’s absurd to think that people would pay someone else to get a loan on their own money.
These types of loans are also problematic because the company preparing your loan stands to make more money depending on how big your refund is. This means they could lie, cheat and exaggerate on your tax return. Will they be held liable? Nope, they will have you fill out a form that says that you provided all of the information and that the tax return / tax audit is fully your responsibility, not theirs.
What you need to remember is that your tax refund is your money, not the governments. You’re just getting a refund on what you overpaid during the year. Not only that, but why should this tax preparation company keep a part of your refund. It’s your money. You’re going to get it soon anyway, in full. Don’t be seduced by the lure of instant cash and stay away from refund anticipation loans.