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Tax Refund Anticipation Loans May Be Less of a Rip-Off This Year

[Nov 18, 2009.]


For an individual with bad credit looking for a personal loan, the options can be pretty limited. Banks prefer to lend to good credit borrowers. Alternative lenders, who offer payday loans, fill a need in the marketplace, but may charge high interest rates and fees on bad credit unsecured personal loans.

One personal loan that has been a much-chosen product for the bad credit crowd is called a Tax Refund Anticipation Loan (RAL).

Basically, a RAL is a way to get your tax refund fast--or, rather, the "proceeds" from your tax refund fast, in the form of an "advance." The lender uses your federal tax refund as security for the loan; the U.S. Treasury then direct deposits your refund into the lender's bank account to pay back the loan.

Over the years, RALs have been the subject of much controversy. But this year, RALs are due to get cheaper, giving bad credit people a good option for getting personal loans.

RAL Fees So High They're "Sue-able," But People Still Want These Loans

Refund Anticipation Loan lenders, such as Santa Barbara Bank & Trust and Republic Bank, are not necessarily lowering RAL fees out of the goodness of their hearts. This loan product is changing because Congress is threatening to outlaw RALs entirely due to their interest rates, which often stretch into the 200 percent range when they're described as an annual percentage rate (APR).

H&R Block and Jackson-Hewitt, two major sellers of RALs, have even been sued successfully in RAL class action lawsuits, for not explaining that a RAL is a loan and for automatically "pushing" people into getting this loan that they did not know was a loan.

However, none of the bad PR or lawsuits have prevented large numbers of people from wanting or needing an RAL. Nearly 9 million people took out RALs in 2007, according to IRS data.

RAL Fees Half What They Used to Be

According to Republic Bank, the average RAL is $3,500. The average "finance fee" (there is an additional "account set up fee" included as well) was, formerly, $127.

When you add in the tax preparation fee charged by the tax preparation company (H&R Block, for example), people--poor people, often--were habitually paying more than $300 to get $3,500. When you consider that the lender is getting paid back by the U.S. government directly, reducing lender risk, you can see why so many consumer groups have been up in arms about RAL fees being so high.

For 2009, Republic Bank has halved the finance fee on that $3,500 RAL to $57. For people with bad credit who need personal loans, that's great and welcome news.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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