
How to calculate loan interest
Learn about types of interest and how to calculate how much interest you’ll pay.
Refund anticipation loan is a concept you need to understand. Bankrate explains.
A refund anticipation loan (RAL) is a loan that advances a person’s tax refund. The loan is an equivalent amount to a person’s federal income tax refund and is repaid by the refund. The loans are not made by the government; generally, they are made by large tax preparation companies.
While RALs typically charge 3 to 5 percent interest, they are expensive as they often come with significant fees in addition to the interest charged. If the borrowers’ tax refund is miscalculated or if the borrower does not receive the anticipated refund, the interest charged by the lender increases dramatically and can reach 36 percent.
Due to their high costs, many financial experts recommend that people avoid RALs, if possible. The Internal Revenue Service (IRS) allows borrowers to e-file, and most refunds take a few weeks to a month to process and can be automatically deposited into the borrower’s bank account.
Stephanie has used a tax preparation company to do her taxes. Her expected refund is $2,500. Her car has recently broken down and the repairs are expected to be $1,500. She needs the car to get back and forth to work. The company that prepares her taxes offers her a RAL loan, which will allow Stephanie to get her car fixed immediately. As required by law, the tax preparation company provides Stephanie the cost of the loan in writing. Including interest and fees, the cost of the loan is $200.
Still waiting for your tax refund? Here’s how to track your refund down.
Learn about types of interest and how to calculate how much interest you’ll pay.
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