Refund Anticipation Loans have followed the floppy disk and the buggy whip into a state of obsolescence.
Refund Anticipation Loans or RALs, as they are called, are very short term loans based on the anticipated receipt of your tax refund. These loans allow you to get your tax refund in a matter of a couple days instead of the weeks or months it can take to receive the actual refund from the government. You get your money now, and the loan gets repaid when the government releases your refund some time later.
Of course there is a cost for this service, and the cost was relatively expensive. But if you don’t really have any other options for obtaining a few thousand dollars quick, fast and in a hurry the cost of the loan really didn’t matter. If grandmaw is locked up in the jailhouse waiting for bail money, a couple hundred dollars in loan costs can seem pretty inconsequential.
Back in the eighties when electronic filing was in its infancy, and it literally took anywhere from 4 to 12 weeks (or more) to receive your tax refund from the government, a couple hundred dollars might not have been such a bad deal in order to speed up the receipt of a couple thousand dollars. But as electronic filing matured, the amount of time it took to receive the actual refund from the government got much shorter. Now it takes about 10 days to receive direct deposit of your actual refund. It is hard to justify paying that much to shave a few days off of the time it takes to receive your refund.
Additionally, the RALs attracted and encouraged fraudulent tax returns due to its popularity with recipients of the Earned Income Tax Credit (EITC or EIC). You could get the money now and be long gone by the time the IRS figured out you were not entitled to the money.
For the past few years the IRS has actively discouraged the use of RALs by limiting the release of the debt indicator, a key piece of information used by the banks to approve or disapprove the loans. But the banks found innovative ways around the missing information. Then the FDIC and the Federal Trade Commission (FTC) entered the fray to try to limit these loans.
So now we find out that the last bank still swimming against the tide of disapproval against RALs has entered into a settlement agreement with the FDIC to end the program at the end of this tax season. The FDIC entered the discussion because of their regulatory responsibilities over the banking system. So now it appears we have reached the end of an era.
Tax On Wheels, LLC hasn’t offered a RAL program the past few years because we saw the handwriting on the wall. From the very beginning of the electronic filing era we have always encouraged our clients to file electronically and to use direct deposit in order to get their refunds as quickly and inexpensively as possible. Most clients took that advice. However, there were always a few clients that, for whatever reason, couldn’t wait for their refunds, or didn’t want to. Now they will no longer have a choice.