Disadvantages of a Refund Anticipation Loan

A refund anticipation loan (RAL) is money borrowed from a bank or lender that represents a borrower's expected income tax refund. Although an RAL can put money in a borrower's possession quickly, there are some disadvantages associated with this type of loan.

High Risk Equals High Interest

It is not uncommon for a person to make a mistake on his or her income tax forms. Therefore, many people over estimate the amount of money that they will receive back from the government. For this reason, when a lender loans out a refund anticipation loan, the lender charges a high interest rate to balance the high chance that a borrower will not receive enough money to pay back the loan.

Total RAL Cost Equals Tax Refund

A borrower cannot receive a loan equal to his or her tax refund. A borrower can receive a loan equal to his or her tax refund minus processing fees and interest rate. The borrower will need to pay out in order to receive a refund anticipation loan, whereas if the borrower waited to receive the tax refund he or she would receive a higher amount of money.     

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