Refund Advance Loan (RAL)

A refund advance loan is a loan made to a taxpayer against a portion of an anticipated federal tax refund, arranged through the firm preparing the return and repaid out of the refund when the IRS issues it. The Consumer Financial Protection Bureau describes it in those terms: "Some tax preparation firms may offer you an advance, which is a loan against a portion of the estimated amount of your tax refund. This loan is called a refund advance loan (RAL)." The amount offered is usually a fraction of the estimated refund, less the preparation charge and any other fees, and the term runs for a few weeks at most, until the refund arrives. Two features of that structure matter more than the headline price. The loan is repaid from a temporary account the preparer opens in the taxpayer's name, so repayment happens before the taxpayer ever touches the money. And the obligation is the taxpayer's, not the refund's, so a refund that arrives short does not shrink the debt.

The name changed, and the older name still appears in official material. For most of the product's history it was called a refund anticipation loan, and that phrase is still used by state lending statutes, by the Taxpayer Advocate Service, whose 2017 Most Serious Problem #21 is titled "Refund Anticipation Loans," and by the IRS itself, whose refund-inquiry guidance refers to "a Refund Anticipation Loan (RAL) or Refund Anticipation Check (RAC) through your preparer or preparation software." CFPB's consumer-facing material now expands the same abbreviation as "refund advance loan," and the tax preparation industry markets it as a "refund advance" or "tax refund advance." The product is the same in each case: a short-term loan secured in practice by the refund. The reason to know both names is that the terms a borrower is shown will say "advance" while the consumer-protection law that governs the transaction in a given state may still say "anticipation."

The much more consequential naming problem is the one a single letter hides. A refund anticipation check, abbreviated RAC and also sold as a "refund transfer," is not a loan. CFPB's own explanation puts the two side by side: "With a refund anticipation check, you pay fees to delay paying tax preparation costs. With a refund advance loan, you borrow the cash now." In a refund transfer the preparer opens a temporary bank account, the IRS deposits the refund into it, the preparation charge and a fee for the transfer itself come out, and the taxpayer receives the remainder. CFPB puts that fee typically in the $30 to $50 range. Nothing is borrowed and nothing is advanced; what the customer buys is the ability to pay nothing out of pocket at the time of filing. The two products are frequently sold together, with the transfer providing the account the advance is repaid through, which is how people end up describing a fee-free advance as free when the package around it was not.

The economics changed once banks left and preparers took over, and the trigger was an IRS decision rather than a lending rule. Until 2010 the IRS gave lenders a "debt indicator" with each electronically filed return, telling them whether the refund was likely to be reduced by an offset. The Taxpayer Advocate Service records what followed: the IRS stopped providing the debt indicator from the 2011 filing season "and, as a result, most banks exited the RAL market by 2012." The same report notes that refund anticipation loans reemerged from the 2017 filing season. What replaced the bank product is one tax preparation chains use to win customers, often advertised at zero percent and no fee, with the preparer, in the Taxpayer Advocate Service's words, "willing to incur the RAL fee as a marketing expense to get clients in the door." That does not make the transaction costless to compare. The advance is available only if the customer has the same firm prepare and file the return, so the price can be embedded in the preparation fee and in whatever the refund transfer costs; the Taxpayer Advocate Service warned that preparers "can also recoup the costs they incur to offer no-fee RALs to their clients by increasing return preparation fees," and that the resulting hidden fees "may be difficult to identify." Some advances are disbursed onto a prepaid card rather than into a bank account, which introduces the card's own fee schedule. CFPB's flat statement, that fees and interest "vary greatly" and the terms should be reviewed, is the accurate posture, and no national figure should be assumed.

The risk that survives a zero-percent offer is the repayment risk. The underwriting is thin because the collateral looks certain, but the refund is an estimate until the IRS processes the return. It can shrink because of a math error, a disallowed credit, an identity-verification hold, or an interception under the Treasury Offset Program for a defaulted federal student loan, past-due child support or another delinquent federal debt. CFPB states the consequence plainly: the IRS still has to review and process the return, "so you could be responsible for RAL fees and other charges even if your refund is smaller than expected." Where the shortfall is larger than the advance, the borrower owes an ordinary debt to the lender with no refund left to pay it from. The Taxpayer Advocate Service's 2017 report tied rising demand for these loans to the statutory February hold on refunds claiming the earned income credit or the additional child tax credit, which is to say the households most likely to be offered an advance are the ones whose refunds arrive latest and matter most.

1. The return is prepared and filed by the provider. The advance is tied to the preparation service; it is not sold on its own.

2. The lender sizes the advance. It is a portion of the estimated refund, net of the preparation charge and other fees, and the provider may look at income and credit information before approving it.

3. A temporary account is opened in the taxpayer's name. The refund will be directed there rather than to the taxpayer's own account.

4. The advance is disbursed, by deposit, by check, or onto a prepaid card with its own fees.

5. The IRS issues the refund on its own schedule and deposits it into the temporary account.

6. Everything is deducted in order and the taxpayer receives what is left: the advance, the preparation charge, the refund transfer fee if one was used, and any interest or loan fee.

Take an example. Ellen expects a $3,400 refund. The preparer charges $250 to prepare and file the return, $40 for the refund transfer that lets her pay nothing up front, and offers a $1,500 advance at no interest, which she takes. When the IRS deposits $3,400 into the temporary account, $1,500 repays the advance, $250 pays the preparation charge and $40 pays the transfer fee, leaving her $1,610. Her total cost was the $290 in fees, and the advance itself cost nothing. Now change one fact. The IRS adjusts a credit and the refund arrives at $900 instead. The account now holds $900 against $1,790 of advance and fees, so Ellen has received $1,500 she must repay and is $890 short. The zero percent was real; the obligation to repay was the part that never depended on the refund.

Pros

• Money is available within a day or so of filing, weeks before the IRS issues the refund, which matters when a bill is due now.
• Many advances are genuinely offered at no fee and no interest, because the preparer treats the loan as the cost of winning the customer.
• The repayment is automatic out of the refund, so there is no schedule to miss and no late fee to trigger.
• Approval generally does not depend on the kind of credit history a conventional lender would require.

Cons

• The advance is available only to customers of the firm that prepares the return, so the cost is bundled into the preparation fee rather than priced on its own.
• A refund that arrives short leaves the borrower owing the difference, with the collateral gone.
• Nothing about the product makes the IRS pay sooner, so the only thing bought is time.
• Fees and interest vary by provider and, where a prepaid card is used to disburse the money, the card adds a separate fee schedule.
• The refund transfer that usually accompanies the advance is a real charge, and CFPB puts a typical one at $30 to $50, which is easy to overlook when the headline says zero percent.