Refund Anticipation Loan.

A (Tax) Refund Anticipation Loan (RAL) is a high interest rate short-term loan secured by a taxpayer’s expected tax refund. Commonly, the taxpayer applies for the loan through a paid tax preparation firm. The tax preparation firm receives a fee for each loan originated, but US Internal Revenue Service rules prohibit basing this fee on the amount of the expected refund. Only the banks through which the loan is made are allowed to charge interest or finance charges.

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12 million taxpayers used a RAL in 2004, according to the National Consumer Law Center [1]. With e-filing, tax refunds can be direct-deposited into the taxpayer's bank account within two weeks, rendering RALs less attractive to some.

In Canada the process is referred to as "tax rebate discounting", where a tax preparation firm purchases the anticipated refund in exchange for a percentage of the refund amount. Canada Revenue Agency rules establish the maximum discounting fee as 15% of the first 300 C$ and 5% of any remaining amount. No other fees for preparation or filing the return are permitted. This commonly works out to a high effective interest rate, although in a small number of cases the discount may be comparable or even less than an ordinary tax return preparation fee.

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