The loans that are offered based on the income tax refund are known as Refund Anticipation loans. The loans for bad credit shortly termed as RAL, are loans for a short duration. The tax preparers are the lenders of Refund Anticipation loans. Though the loan amount is accessed instantly, it is lesser than the refund amount of the borrower. The amount lent is recovered from the tax refund and the total cost of the loan along with the interest will be equal to the tax refund amount, though the borrower is offered lesser amount. The entire refund will go to repay the tax preparer.
Not Favorable for the Borrowers
The borrowers are charged origination fee and the cost involved in electronic filing. While the loan amount is handed to the borrower, the charges due to the origination of the loan and other services are retained by the lender from the principal of the Refund Anticipation loan. The tax preparers, who are the lenders here, are secured of the return from the refund amount. But the loans are not beneficial to the tax payers. The loan amount is secured by the signature of the tax payer who entitles the lender to cash out the tax refund check for the loan.
The borrower is forced to pay more for the loan than its actual worth. Quick access may be considered an advantage, but the expensive nature of the loan makes it unfavorable for the borrowers. Though the credit history of the borrowers is not considered, the consumer information is verified with the IRS when the application for Refund Anticipation loan is submitted. The people with low income are the target of the lenders. Generally, the refund amount will be deposited into the account of the taxpayers in a very short time, say two weeks approximately, if the filing is done electronically.
The high interest rates and the term of the Refund Anticipation loans resemble that of the payday loans. The lenders justify the high interest rates to the involvement of risk in offering the loans. There are possibilities for the tax payers to come across some issues with IRS officials which would lead to the sanction of lower amount of refund than anticipated. The loans are not as favorable to the borrowers as to the lenders. However, if the needs are urgent and cannot wait till the time, he has no other way than to obtain this loan.
The Refund Anticipation loans offer financial support for a very short time, say a week. The interest rate can be almost 200%. Many consumers are yet to realize that the instant refund programs are none other than unsecured loans. Before applying for Refund Anticipation loans, it is recommended to consider other options. Electronic filing and processes have reduced the waiting time for the refund sanction and so if one can wait to get his funds, high interest Refund Anticipation loans could be avoided.