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A Refund Anticipation Loan (RAL) is a short-term loan secured by a taxpayer’s expected tax refund. The Refund Anticipation Loan system was first invented, developed and implemented in Virginia Beach, Virginia by an accountant named Ronald Smith in 1985 and was quickly copied by major tax firms across the United States and the world. Today, these loans are not only issued by tax firms but also car dealerships and check cashing firms. Examples of well known firms that offer such loans are H&R Block, Jackson Hewitt Tax Service, Liberty Tax Service, and Western Union.
12 million taxpayers used an RAL in 2004, according to the National Consumer Law Center *. With e-filing, tax refunds can be direct-deposited into the taxpayer's bank account within two weeks, rendering RALs obsolete.
Controversy
Despite their commonplace nature, RALs are controversial. Supporters of the practice say the loans allow people access to funds immediately in cases of an emergency such as overdue medical bills, credit payments, and other debts while they wait for the IRS to process their taxes (which can take anywhere from three weeks to two months). Opponents of RALs such as the National Consumer Law Center argue that the profit motive of lenders result in RALs being too often issued to low-income individuals who are made to think the wait for their refund is longer than it really is, who do not realize they are making a loan and the outrageous interest rates charged by the loan, and who do not actually need the funds immediately. Even cash advances on credit cards have much more attractive rates than RALs.
More than half of all RAL consumers are low-income recipients of the Earned Income Tax Credit (EITC), despite the fact that EITC recipients only constitute 15% of all taxpayers.
In 2002, H&R Block settled a lawsuit brought by the New York City Department of Consumer Affairs for predatory lending practices with regard to RALs and the EITC.
In 2003, the Illinois Attorney General issued a detailed warning to taxpayers about such loans.
On 2006-02-15, California's attorney general Bill Lockyer sued H&R Block over its refund anticipation loan business, whose interest rates top 500% including fees. Lockyer said the company falsely portrays the nature of the loans, advertising "cash, cold, green, in your hand, out the door." In May 2005, a federal judge in Chicago rejected a $360 million settlement as inadequate. *
External links
"Refund Anticipation Loan"