Taxpayers that are seeking additional money for holiday spending may be tempted to utilize an expensive option offered by many tax preparers. Pay stub refund anticipation loans are frequently used to provide extra cash for the holidays. However, the cost of these loans is so high that it dramatically reduces the total tax refund.

What is a Pay Stub Refund Anticipation Loan?

A pay stub refund anticipation loan (pay stub RAL) is an advance on an expected tax refund. It is secured by the expected refund which is used to repay the loan. Most pay stub loans carry usurious interest rates that can reach above 100% APR.

What are the Costs?

If you, someone you know or a client is considering a pay stub RAL, it is important to understand the cost of such a loan. You can pay a fee of up to $102 just for the right to access your money a month early. This translates to a very expensive fee that is added into your yearly budget.

Nearly every taxpayer that uses a pay stub RAL also pays for preparation of their tax return. These fees also tend to be pricy, with an additional charge for each document handled. The total of all of these fees can easily exceed $300 to $400.

A taxpayer that is receiving the earned income tax credit (EITC) is getting assistance from the government because of the lower wages earned in that household. These low wage earners cannot afford to throw away $300 or more each year in excessive fees. This is money that could go to feeding a family, paying utility bills or putting gas in the car.

The truth of the matter is that tax refunds have never been provided more swiftly than they are today. A taxpayer that electronically files (efiles) their taxes and chooses to have their refund deposited directly into their bank account can have their money in about 10 days. If they have there taxes prepared and efiled by a Volunteer Income Tax Assistance (VITA) or a Tax Aide volunteer, they pay nothing!

Related Article

For more information about pay stub RALs, including industry trends and an examination of the scope of such activity, this article (Pay Stub and Holiday RALs: Faster, Costlier, Riskier in the Race to the Bottom) provides a great deal of insight into the pay stub RAL business. It is written by Chi Chi Wu with the National Consumer Law Center and Jean Ann Fox with the Consumer Federation of America.