Refund anticipation loans (RALs)

Definition

Refund anticipation loans (RALs) are short-term loans issued by lenders based on a taxpayer's anticipated income tax refund. These loans are typically offered by tax preparation companies and come with high interest rates and fees.

5 Must Know Facts For Your Next Test

1. Refund anticipation loans often have a high annual percentage rate (APR), which can significantly reduce the refund amount.
2. The effective interest rate of an RAL can be much higher than the stated rate due to additional fees and short loan terms.
3. Taxpayers who receive RALs must repay the loan even if the IRS delays or reduces their expected refund.
4. RALs provide immediate access to funds, often within a few days of filing taxes, but come at a high cost.
5. Many financial advisors recommend avoiding RALs due to their high costs and potential financial risks.

Review Questions

• What is the primary financial risk associated with taking out a refund anticipation loan?
• How does the effective interest rate of an RAL compare to its stated interest rate?
• Why might someone choose to get an RAL despite its high costs?

Related terms

Annual Percentage Rate (APR): The yearly interest rate including fees applied to a loan or credit product.

Effective Interest Rate: The actual cost of borrowing on a yearly basis, accounting for compounding periods.

Short-term Loan: A type of loan scheduled to be repaid in less than one year.