Tax Refund Anticipation Loan (RAL) Definition

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Tax Refund Anticipation Loan (RAL) Definition

What Is a Tax Refund Anticipation Loan (RAL)?

A tax return anticipation loan is a loan made available by a third party against a taxpayer’s anticipated income tax refund.

Key Takeaways

  • A tax return anticipation loan is a loan made available by a third party against a taxpayer’s anticipated income tax refund.
  • Most refunds are paid within a few weeks of the person submitting their annual tax return to the Internal Revenue Service (IRS); a tax refund anticipation loan (RAL) allows a taxpayer to obtain their money even faster.
  • Third-party firms provide tax return anticipation loans (RAL).
  • These third-party organizations will charge the borrower interest as well as other fees and levies, making tax return anticipation loans very costly for taxpayers.

How a Tax Refund Anticipation Loan (RAL) Works

Individuals who submit their income tax returns for the year may be eligible for a tax refund. Tax refunds reimburse a taxpayer for any excess income tax paid to the state or federal government during the previous year, generally via withholding from a salary. Today, the vast majority of taxpayers in the United States get income tax refunds.

Depending on the taxpayer’s desire, the US Department of Treasury provides refunds in the form of government checks, US savings bonds, or direct payments to the taxpayer’s bank account. Most refunds are provided within a few weeks of the individual submitting their annual tax return to the Internal Revenue Service (IRS), the division in charge of collecting taxes. Choosing direct deposit is often the quickest way for a taxpayer to get their refund.

A tax refund anticipation loan (RAL) allows a taxpayer to collect their money even faster. These loans are made by third-party firms rather than the US Treasury or the IRS. As a consequence, they are susceptible to the lender’s interest rates and costs. Large tax preparation organizations often provide tax return anticipation loans to individuals anticipating refunds of a few thousand dollars or less.

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Advantages and Disadvantages of a Tax Refund Anticipation Loan

An person might receive immediate access to money based on their projected tax return with a tax refund anticipation loan. However, since taxpayers often get their government refunds within a few weeks of completing their tax returns, borrowing that money usually makes little financial sense unless the person is in imminent need of the cash.

Refund anticipation loans may be an extremely costly kind of borrowing, particularly given the short-term gain they bring. If the lender charges interest, the advertised interest rate may seem low, often between 3% and 5% of the return amount. However, when extra fees and levies are included, the final cost might be significantly greater.

Many individuals see a tax return as money they were compelled to save or a pleasant income supplement. However, the larger a taxpayer’s refund, the more money they have lent to the government tax-free during the last year.

Taxpayers may also consider changing their federal and state tax withholding so that their employers deduct enough money from their paychecks to satisfy their expected tax liabilities for the year, but not so much that they get a substantial return. Taxpayers who take this step and are disciplined enough to save the excess money throughout the year may set it away for future use. With these additional savings, people may never need to consider obtaining a tax return anticipation loan.

What is a tax refund anticipation loan?

A tax refund anticipation loan is a loan provided by a private third-party financial services firm to people who can demonstrate that they are entitled to a tax refund from the IRS based on their tax return. Such loans are often small in size and are intended to meet borrowers’ short-term monetary requirements.

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What are the pros and cons of a tax refund anticipation loan?

On the plus side, a tax return anticipation loan may be a welcome source of short-term income for people struggling to pay day-to-day expenditures or unexpected, unforeseen charges such as medical bills. Tax return anticipation loans are often simpler to qualify for than bank loans since they are secured by the tax refund itself, presenting lenders with less risk. The disadvantage of such loans is that they have relatively high interest rates. Another disadvantage of even being eligible for a substantial refund against which a loan may be made is that the borrower had too much tax withheld from their salary, allowing the government unfettered use of your money for the whole tax year.

What are alternatives to tax refund anticipation loans?

Credit cards may be utilized to meet short-term financial demands, but carrying a load can be costly over time unless you can take advantage of 0% APR promotional periods when initially creating an account. Other sorts of loans, such as unsecured personal loans with loan amounts of $10,000 or more, might also be a possibility, generally with affordable interest rates depending on high credit quality. Secured personal loans, such as title loans, are an option, but often have exceptionally high interest rates, leaving borrowers in debt or losing the title to their car.

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