Tax Refund Anticipation Loan (RAL): What it Means, How it Works

What Is a Tax Refund Anticipation Loan (RAL)?

A tax refund anticipation loan is a loan offered by a third-party company against a taxpayer's expected income tax refund.

How a Tax Refund Anticipation Loan (RAL) Works

When individuals file their income tax forms for the year, they may be entitled to a tax refund. Tax refunds return the excess amount of income tax that a taxpayer has paid to the state or federal government during the past year, typically through withholding from a paycheck. In the U.S. today, the majority of taxpayers receive income tax refunds.

The U.S. Department of Treasury issues refunds in the form of government checks, U.S. savings bonds, or direct deposits to the taxpayer's bank account, depending on what the taxpayer has requested. Most refunds are issued within a few weeks after the taxpayer submits their tax return for the year to the Internal Revenue Service (IRS), the bureau that is responsible for collecting taxes. Electing the direct deposit option is generally the fastest method for a taxpayer to receive their refund.

A tax refund anticipation loan (RAL) is a way for a taxpayer to receive their money even more quickly. These loans are provided by third-party companies, not by the U.S. Treasury or the IRS. As a result, they are subject to the interest rates and fees set by the lender. Tax refund anticipation loans are most often offered by large tax preparation companies to taxpayers who are expecting refunds of a few thousand dollars or less.

Advantages and Disadvantages of a Tax Refund Anticipation Loan

With a tax refund anticipation loan, an individual can get quick access to a sum of money based on their expected tax refund. But because taxpayers will typically receive their refunds from the government within a few weeks of filing their tax return, borrowing that money usually makes little financial sense, unless the taxpayer is in immediate need of the funds.

Refund anticipation loans can be a very expensive form of borrowing, especially considering the short-term benefit they provide. If the lender charges interest, the quoted interest rate may seem small, generally around 3% to 5% of the refund amount. However, the total cost can be much higher when additional fees and charges are also factored in.

Many people view a tax refund as a chunk of money they've been forced to save or a nice income bonus. However, the bigger a taxpayer's refund is, the more money they have been lending tax-free to the government during the past year.

As an alternative, taxpayers might consider adjusting their federal and state tax withholding so that their employers withhold enough money from their paychecks to cover their likely tax obligations for the year, but not so much as to produce a large refund. Taxpayers who take this step and have the discipline to save that extra income throughout the year can put it aside for future use. With these extra savings at their disposal, taxpayers may not ever need to think about accessing a tax refund anticipation loan.