Department of Business Affairs and Consumer Protection

Refund Anticipation Loans (Instant Refunds). What Consumers Need To Know.

The High Cost of “Instant Refunds” or Refund Anticipation Loans.   Important tips for Consumers during Tax Season.

Consumers who are considering Refund Anticipation Loans (RAL’s), also known “instant tax refunds.”  Should be well informed before making the decision to use this service.

RAL’s may sound like quicker refunds but what they are in fact are very expensive loans.  Consumers should not be fooled- RAL’s are expensive loans that come along with fees, finance charges, and high interest rates that are often not worth the price.

What is a RAL loan?

An RAL is a loan that tax preparer’s offer to consumers through banks affiliated with those preparers. They are marketed as being a convenient and fast way to obtain income tax refunds, in the past they were reffered to as “Instant Refunds.” Today, laws require them to be called by the proper name, Refund Anticipation Loans.

Paying back an RAL loan.

RAL’s must be repaid even if the IRS denies or delays your refund, or if your refund is a smaller than expected.  Some lenders will allow you to borrow more than the expected amount of your refund, putting consumers at risk of not being able to repay the loan. Credit can also be impacted by these loans.

BACP offers the following tips for consumers:

Determine if you really need the money immediately.

Unless the extra time waiting for your refund will have a major impact such as loosing your home to foreclosure, it is best to wait for your refund. While they may provide some quick relief- most consumers are better served by waiting the extra time for their full refund.  If you file a tax return electronically, the typical turn around time is two to three weeks. You an find out more at www.irs.gov

Ask your tax preparer to outline all costs.

If you opt for a RAL there may be many additional costs. These include loan fees, interest charges, and fees to cash the  refund checks. Illinois law requires that tax preparers who are facilitating RAL’s to disclose the cost of those RAL’s.

Tax prepares must break down the following costs for consumers in writing:

  • Fees that the preparer charges for tax preparation;
  • Fees that the prepares charges for facilitating the RAL;
  • The RAL’s annual percentage rate (APR);
  • The RAL’s total cost;
  • The estimated date the consumer can obtain their RAL money.

If the tax preparer does not break down these figures for you, do not accept the offer.  File an online complaint or call 311 to report them.

Consider paying tax preparation fees upfront

Many tax preparers will offer to take their fees out of your refund.  Keep in mind, this option is typically more expensive.

In order to take your tax preparation fees out of your refund, the preparer directs your funds to a bank, which acts as a middle man and takes out additional fees. Ask your tax preparer whether you must pay additional fees for not paying your tax prep fees upfront.

Free tax preparation assistance is available

The City offers free tax preparation assistance for families who earned up to $50,000 last year and individuals who made up to $25,000.  Taxes are prepared for free by volunteers from the Center for Economic Progress and Ladder Up.  Call 311 for locations near you.

The IRS also provides free taxpayer assistance. You can visit www.irs.gov for more information or call 312-566-4912.

You may qualify for a Tax Credit

The Earned Income Tax Credit (EITC) provides tax refunds of up to $5,657 to low-income working families. Last year, the City’s preparation sites returned more than $35 million to more than 22,000 Chicagoans. The tax credit also includes free tax preparation services that are available at 29 locations throughout the City, many of which are open on weeknights and Saturdays.

The cutoff income for the EITC is $48,279 for families with three or more children. This year, the benefits have been made higher for families with more children.  The cutoff income for individuals is $18,440, and in some cases, taxpayers can receive the EITC even if they do not owe any income tax.

Consumers should always report fraud. You can do it online or call 311.