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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 9, 2021

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Refund anticipation loans, more commonly referred to as RALs, will no longer be offered after this year’s tax season. Some weep at this news, while others cheer, but the general consensus is that executing this type of financing is good for the American public. Why’s that? Because many feel RALs simply suck tax refunds away from those who rightfully deserve them: taxpayers. Then the funds are diverted and filtered into the coffers owned by large banks and corporations.

The sentiment held against these expensive personal loans was summed up by Chi Chi Wu, an attorney for the National Consumer Law Center (NCLC): “We will be glad to see the last of RALs, which were both high-cost and high-risk. It’s not a moment too soon to stop multi-million dollar corporations from skimming off refunds of hard-working families.”

What’s a RAL?

For those unfamiliar with RALs and how they work, just imagine a quicker process of receiving one’s tax refund from the federal government. Many Americans bank heavily on the fact that they will receive a large sum of state and federal money returned them come the months of March to May, but when bill collectors, necessities, and desires are standing right before them, and hundreds of dollars owed to the individual taxpayer are being held up in the bureaucratic operations of the IRS, some look to receive an advance on that money. As a result, they approach lenders who specialize in RALs, which are essentially cash advance loans that come at a high cost to the borrower.

In exchange for receiving one’s money quickly and ahead of schedule, a RAL personal loan lender would often charge upwards of 150 percent interest. While such high rates sound similar to other cash advance loans, the difference is that RALs don’t have principal restrictions, meaning they can be for one’s entire tax refund of thousands and thousands of dollars.

And since tax refunds are never guaranteed, some who participated in these high-risk personal loans found themselves in a very tough situation when they took out a RAL but later didn’t qualify for their refund. Imagine a borrower who takes one of these personal loans out at the steep rate of 150 percent. Then when their tax return came, they found it was far lower than they expected due to wage garnishment. They would be stuck with a several hundred (or several thousand) dollar loan at a triple-digit interest rate, and be expected to pay it back without any money.

To stop such situations, the IRS drove a stake directly through the heart of the RAL.

How Can They Stop Lenders?

Those who administered tax return personal loans did so by using IRS records which informed lenders who much an applicant was expected to receive on their return. Then the lender could offer the personal loan at whatever terms he wished because he knew the amount of money his borrower would have in a short amount of time.

But last year the IRS announced it would no longer be providing that information, and removed debt indicators from their disclosed records.

Without that information, banks who offered such high-cost, high-risk personal loans put themselves in a far riskier position then even the borrowers. The IRS crippled this industry to such an extent that today there is only one bank in the nation still offering RALs, according to Money Talk News.

So as tax day approaches, take a moment to remember the RAL—the volatile financial monster that plagued consumers for years, but whose writhing, broken body will permit it to bother the public no more.