Thursday, January 21, 2010

RAL Season

RAL Season[i]


Once, when Albert Einstein was asked about his US taxes, he replied, “This is too difficult for a mathematician. It takes a philosopher.”  Many people would agree, and should, as the US Tax Code is not only mathematical, it is full of code which, by design, favors certain behaviors, subsidizes some expenditures, and attempts to employ a progressive tax system - where those that receive the most income are supposed to pay a greater percentage of their income in tax.  These rules, the widely-held belief that others get “tax-breaks” that the taxpayer covets, coupled with the fact that many citizens should have paid more attention in math class, leads tax filers to utilize paid tax services.  This is particularly true of America's most financially vulnerable taxpayers - those from low- and moderate-income families.  In 2008, it is estimated that these consumer lost (paid) about $800 million of their refunds to tax-preparers offering fast (and tempting) tax refund anticipation loans (RALs), an often unnecessary and costly product.  We have entered RAL season.


Consumer advocates at the National Consumer Law Center (NCLC), the Consumer Federation of America (CFA), as well as our University of Missouri Office for Financial Success and the University of Missouri Extension Service are warning taxpayers to stay away from refund anticipation loans (RALs).  RALs are an avoidable tax-season expense, as long as the taxpayer is armed with this knowledge and has the patience to wait a few days for their tax refund. As mentioned above, data from 2008 found that RALs decreased the refunds of about 8.4 million American taxpayers, through charging $738 million in loan fees, $68 million in other fees, while another 12 million taxpayers spent $360 million on related financial products, as a means to receive their refunds.


In several instances, federal regulator actions have been taken against RAL lenders, putting them out of business.  Some tax preparation services have lost their source of RAL funding, as a result.  Other RAL lenders have lowered the price of RALs to levels more similar to “mainstream” tax-preparers but, even with lower prices, RALs remain on the “Avoid” list of products. How do you avoid them?  It is easy, just say, “NO!”


You might wonder what makes RALs so bad for consumers, especially when the consumer might think they need the money now, as opposed to later.  First, RALs are loans where the taxpayer's expected refund is to repay the debt.  Typically, the wait for a refund from an electronically filed tax return is under three weeks and it is estimated that most taxpayers receive their refund in two weeks, without the costly loan.  Yet, quick money is always a temptation and those that are the most tempted are usually the same people that could use the full amount of their refund – not their refund less the cost of the RAL.


So, what are the costs of a RAL?  First, taxpayers (really “borrowers” in this case) must pay a loan fee ranging from $34 to $130.  Tax preparers may, also, charge one or more separate add-on fees, ranging from $25 to several hundred dollars.  The price of RALs has dropped significantly for loans in the $1,000 to $4,000 range, as the price of an average RAL of $3,300 has decreased from over $100 in 2007 to about $65 in 2010.  The biggest cost to the consumer, however, is the effective annual percentage rate (APR).  The APR for a RAL ranges from about 50% (for a larger RAL) to nearly 500% (for a smaller RAL).  It is estimated that, when all fees are appropriately included, the APRs range from about 85% to nearly 1,300%. For example, the average RAL of $3,300 carries an average APR of 72%.  If you want an instant RAL (for an additional fee), the effective APR for $1,500 RALs were found to range from 185% to 211%.  (Would ever agree to pay this great of a rate of interest for a credit card, car loan, or home mortgage?  I hope not.)


So, what do you do, if you need help with preparing your taxes?  First, look for Volunteer Income Tax Assistance (VITA) sites, like our MoTax program from Missouri Cooperative Extension.  Remember, VITA volunteers are certified by the IRS to be qualified in preparing taxes and they do so without cost (i.e., it is free).  They do not offer RALs but they might offer some advice on how you can lower your taxes or use your refund to help your quest toward financial success.  Click on the following, to see a list of all the VITA sites in the United States, in order to find one near you.  If you know that your parents use a “store-front” tax preparer, ask mom or dad if they typically get a Refund Anticipation Loan or if they pay extra to get their refund sooner.  If they do, ask them to read this Financial Tip and show them the list of VITA sites in your community.  


Finally, while the IRS and the Office of Comptroller of Currency (OCC) have increased the regulatory requirement for tax preparers, they cannot police the tax-filing marketplace as well as we, the US consumer.  If everyone would stop using these overpriced, abusive products, the products would soon cease to exist and more people would be able to use their money in pursuit of their financial success.  This solution begins with you, ends with you, and doesn’t cost the US Government a dime of our tax dollars.  You have to love the price of an informed, responsible citizenry.


POSTCRIPT:  For more information:  NCLC and CFA will be publishing their annual comprehensive report on the RAL industry, regulation, and litigation later in February 2010. The report will be available on NCLC's website at or on CFA's website at .


A coalition of state and local consumer groups will be releasing reports on RALs for their regions, including the Community Reinvestment Association of North Carolina ( ), NEDAP ( ), Woodstock Institute ( and the California Reinvestment Coalition ( ).

[i] Much of this week’s Financial Tip was motivated from an emailed newsletter from the National Consumer Law Center.  It was authored by Chi Chi Wu.

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