What is a Refund Anticipation Loan?

A refund anticipation loan (RAL) is a type of consumer loan offered on the basis of a pending tax refund. This type of short-term loan is sometimes provided by businesses that aid in filing the returns, and base the amount of the loan on the anticipated amount of that return. Depending on the policies of the service, that amount may be a fixed percentage of the expected tax refund or equal the total refund, less any fees assessed for the preparation and processing of the return.

In many nations, a refund anticipation loan is offered by businesses that specialize in preparing tax returns on behalf of their customers. A basic strategy to manage the short-term loan is to create what amounts to a credit account for the client, with the limit on that account determined by the amount of the return, less the preparation and submission fees. These accounts may be managed by the preparation service, or be established with a bank that functions as a partner to the service. Once the tax return is received, the balance of the credit loan is retired, along with any interest charges that accrued in the interim. The remainder of the return is forwarded to the taxpayer, either by means of an electronic funds transfer to a designated account, or in the form of a check.

The main benefit of a refund anticipation loan is the ability to make use of the funds from an anticipated tax return before the documents are received and processed by the tax or revenue agency. This is because the lender receives a tentative pre-approval from the tax agency, indicating that the return does not contain any mathematical errors and that the taxpayer does not have any outstanding tax debt associated with previous tax years. For people who plan on using refunds to pay off debt or to manage some upcoming expense, having access to the funds sooner rather than later can produce benefits that offset any fees and charges associated with the loan.

While many taxpayers still utilize a refund anticipation loan to gain early access to funds from a tax return, the service has decreased in popularity in recent years. This is largely due to the increased amount of online filing options available to consumers. Unlike past decades in which a taxpayer could wait several weeks to receive a tax refund, filing electronically and arranging for direct deposit into a bank account can sometimes result in receiving the refund directly from the tax agency anywhere from several days to a couple of weeks. The faster receipt of returns from revenue agencies means that the idea of obtaining a refund anticipation loan and paying fees and interest on that loan is less attractive to consumers, except in cases when the need for the money is immediate.