Guide To Income Tax Loan...

You've just learned you're getting the biggest tax refund you've had in years. But some pressing bills and credit card payments are causing you to think about getting an income tax loan to get the refund money quicker. You should think twice before proceeding.

An income tax loan, or early refund offer is called a "Refund Anticipation Loan" or RAL for short. It is a loan that is borrowed against your expected tax refund. It is an extremely short term loan which is arranged by your tax preparer through a bank. When the IRS sends your full refund to the bank, the loan is then repaid.

According to a report in 2005 by the Consumer Federation of America and the National Consumer Law Center, the loans cost about $29 to $120, depending on the size of the refund. That means the interest rate on the income tax loan could range from about 40% to over 700% annual percentage rate of interest. Thats VERY expensive!

The average refund is about $2,150, with a typical finance charge of $100 for a refund anticipation loan - a 178% APR. If additional fees for tax preparation, electronic filing, or check-cashing are charged, it will double or even triple that amount.

So how much time will an income tax buy you? A typical income tax loan gets your refund to you in about 1-4 days. Compare 7-10 days with electronic filing and direct deposit to your bank. Now you've payed an exhorbitant interest rate for a matter of a few days. That makes this loan look like it came from a loan shark!

David Tinney
David Tinney,

Tax Guide
Tax Prep