This will be the last year banks will be able to offer Refund Application Loans (RALs) on a nationwide basis. RALs function a lot like payday loans. Consumers looking to cash in on their tax refund early apply to banks for advance loans in exchange for a pretty hefty fee.
Generally disdained by anyone who gives a lick about consumer finance issues, RALs have been all but wiped out by federal regulators like the FDIC in recent years and are banned to service members under the Military Lending Act.
To give you an idea why, the NCLC points to the Republic Bank & Trust in Louisville, Ky., which charges Jackson Hewitt customers $61.22 on a $1,500 RAL this year. That translates to a whopping 149% APR.
The IRS estimated 5 million consumers received RALs during the 2010 tax season, which is down more than 2 million from 2009.
By December 2010, the three biggest banks backing RALs – JPMorgan Chase, HSBC and Santa Barbara Bank & Trust – had either voluntarily bowed out of the business or were forced out by the FDIC. (See 12 things to do to prepare for tax season.)
The state-chartered Republic Bank & Trust was the last bank standing, but it finally agreed to close its RAL business after April 2012 as part of a settlement with the FDIC.
Now that banks have been elbowed out of the RAL business, nonbanking entities like payday lenders will surely ramp up their efforts to reel in cash-strapped consumers during tax season.
The CFPB only recently announced it would start holding nonbank businesses accountable for harmful consumer practices, but it’s unlikely they’ll really make any headway with tax season in full swing.
There are plenty of alternative routes to take before you decide to pay for an income tax advance.
Here are a few:
E-file for free. The IRS allows low-income taxpayers to file their income taxes for free online and you can receive your refund within two weeks with the direct deposit option. If you don’t have a bank account (like many other Americans), you can still e-file and receive your refund via prepaid debit card. H&R Block is offering that option to consumers through Feb. 4 if they use its prepaid Emerald Card, according to NCLC.
Opt for a Refund Advance Check. How it works: Banks open up a temporary account for consumers into which the IRS deposits their refunds. They then issue a prepaid debit card with the refund, minus a fee, which can range between $30 and $32. Per the NCLC, you’re better off going with businesses that don’t charge for this service.