Be leery of those 'RALs'

Monday, January 15, 2007

It's tax season and some tax preparers may invite you to get a "Refund Anticipation Loan," or "RAL" - a loan borrowed against the expected tax refund.

Such a loan may come a few days faster that the refund, but the Iowa Attorney General's Office cautions Iowans that they will pay extremely high fees to borrow their own money.

A "Refund Anticipation Loan" is just that - a very short-term loan secured by your expected tax refund, arranged by a tax preparer through a bank. You pay finance charges (and, most often, tax-preparation charges as well). The loan is repaid when the IRS sends your full refund to the bank.

RALs are expensive. 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 upon the siz of the refund. That means the interest rate on RAL loans could range from about 40 percent to over 700 percent APR (annual percentage rate of interest). That's a bad bargain for an "advance" of just 7-10 days.

Consumers need to ask their preparers recommending RALs the following questions:

How much will I pay for the loan?

An average refund is about $2,150, with a typical finance charge of $100 for a refund anticipation loan - a 178 percent APR! Fees for tax preparation, electronic filing, or check-cashing can double or triple that cost.

What does the fee buy me?

A RAL loan gets your refund to you in 1-4 days, compared to just 7-10 days if by ordinary electronic refund deposit to your bank.

The Iowa Attorney General also says beware of the new "pay stub RALs," or "holiday RALs." Pay stub RALs are offered earlier than traditional RALs before a taxpayer receives a W-2. The loans are based on a taxpayer's latest pay stub which indicates his estimated tax return.

However, the estimated amount may not reflect pre-tax retirement deductions, or money withheld for child support or taxes. The taxpayer will have to pay the full amount estimated on the pay stub whether or not the refund is large enough to cover the cost of the loan and fees. Pay stub RALs can be as high as other RALs.

The Attorney General advises Iowans to be a smart consumer in seeking their refund.

For more information, contact the Attorney General's Consumer Protection Division, Hoover Building, Des Moines, IA 50319. Call 515-281-5926, or 888-777-4590 toll free.

On the Web: . In February, a list of "Volunteer Income Tax Assistance" sites, and a list of "Tax Counseling for the Elderly" sites in Iowa will be available at .