Tax Refund Anticipation Loans (RALs) are short-term cash advances for the amount a customer expects to receive as an income tax refund. So, it’s the same idea as getting a cash advance on a coming paycheck, except the loan is against your anticipated income tax refund instead of your paycheck. The benefit of a RAL is the same, too. It offers customers a quicker access to cash than waiting for their tax refund.

RALs are usually applied for through a paid tax preparation service, and the service will charge a fee for every loan application. There are actually two fees paid by the consumer: one ranging from $32 to $130 charged by the bank and another that is normally about $40, which is charged by the tax preparer. Applying for the loan can be as easy as signing a form and paying the fee, and could allow you to leave with thousands of dollars in cash.

Tax preparation services are not the only ones who can offer RALs to consumers. Car dealerships often use them to entice customers during tax-season. Retailers also use the refunds to tempt impatient buyers to purchase that large appliance or vacation package they can’t exactly afford at the moment.

RALs are offered at extremely high interest rates that can range anywhere from 40% to over 700% APR, but many consumers find these sorts of extraordinary rates acceptable because it gives them access to cash right away. Another reason consumers accept the terms of these loans is their short duration. RALs only last for 7-14 days, until the IRS refund pays off the loan.

There are several criticisms of RALs. The biggest concern is that the large majority of the consumers applying for these loans are lower-income taxpayers, which means that most of these loans are not used for impulse buys or other unnecessary items. So, the primary consumers of these loans are those that can least afford them, say RAL-opponents.

A report published in March of 2008 by the National Consumer Law Center (NCLC) and Consumer Federation of America (CFA) revealed that almost 9 million taxpayers took out RALs in 2006. In terms of dollars, these taxpayers spent $900 million in loan fees and over 90$ million in other fees. Essentially, taxpayers spent hundreds of millions of dollars to get money that was rightfully theirs one to two weeks early.

Consumers applying for a RAL need to realize that the same risks associated with other types of loans apply to refund anticipated loans, as well. If the IRS does not deposit the refund on time, the consumer is responsible for any interest accrued during the delay. Given the very high APRs of these loans, even a one-day delay could be costly.

Consumers have become increasingly more aware of the high costs of RALs over the years. This explains the steady decline of RAL applications. Tax preparation services like H&R Block and Jackson Hewitt are also decreasing the fees they charge for such loans. However, the report on RALs mentioned earlier shows that millions of American taxpayers are still paying these outrageous fees to get access to their own money a couple weeks ahead of time.

Since the hardest sellers of these RALs are private tax preparation services, lower-income taxpayers can avoid the temptation of an RAL by taking advantage of the IRS Volunteer Income Tax Assistance Program (VITA). This program offers free tax preparation services to those whose income falls below $40,000 a year. Every year, the IRS trains certified volunteers how to prepare basic tax returns. VITA sites are located at such convenient locations like community and neighborhood centers, libraries, schools, shopping malls, etc.

Those interested in VITA may call 211 from a landline phone (United Way) or 800-TAX-1040 (IRS) for VITA locations.