Note this USA Today article cites that people receiving the Earned Income Tax Credit (an anti-poverty credit) paid $1.24 billion for RAL’s.
“They paid an estimated $1.24 billion in refund-anticipation loan fees for 2004″

That’s a lot of money being taken away from the poor, for a tax credit that they could receive for free, if they utilized the IRS free e-filing tools.

Its not just H&R Block, Jackson Hewitt Settlement
http://ag.ca.gov/consumers/content/jacksonhewittrefundfaq.php?PHPSESSID=1c06fdb60e9c133b255e9bca0ca237a9

I do appreciate your comment, but I do have my facts straight. To site your example of a RAL a refund of $3300 paying $121 in interest, would be a cost rate of 3.66%.

However, cost and interest rates are totally different.

That is $121 paid for a loan that is usually at the longest 3 weeks (about 10 business days). When you look at the annual percentage rate of paying $121 on a $3,300 loan for 3 weeks, that interest rate is 63.56%. If the filer gets their refund back in 2 weeks, then the APR is 95.33 percent.

I spoke from direct experience as I formerly prepared taxes for H&R Block, which along with Melon bank has faced several lawsuits on this issue.

I did find a statistic for 2005 citing an average refund amount of $2,150 and a charges ranging from $29 - $120, which is an APR (annual percentage rate) of 40% - 700%. (http://pnnonline.org/article.php?sid=7253 or get the actual report in pdf http://www.consumerlaw.org/news/content/2006RALReport.pdf )

If admin fees are added to the cost and the calculation of interest, then the APR balloons to 1800% see http://www.consumerfed.org/pdfs/RAL_2006_Early_info.pdf )

Many people often think, that it is illegal to charge interest rates that high. The truth is its illegal for banks that are incorporated in some states to charge those rates due to usury laws. However, if those banks are incorporated in Deleware or South Dakota, states that do not have limits on interest, then it is legal.

The cost up front for a RAL, may seem small in comparison to the amount of the refund, however as an interest rate (RAL stands for Rapid anticipation Loan ) it is very high.

In the example you provided, if the bank was charging 20%, then the final charge would be $41.25 on a 3 week loan of $3,300. $121 is about 3 times higher.

A person with a credit card, would be better off almost writing themself a convenience check for $3,300 (so they could have the money right away) and then paying their credit card off with the actual refund when it comes via direct deposit after they efile.

Don’t get me wrong, I’m not advocating the use of a convenience check, but to compare, if they have a 20% interest rate on their card, they would pay $42.25 in interest. Even if they had to pay the higher $75 max fee for the check, their total cost would still come in at $117.25, $4 less than a RAL under the given info above. Plus, they might be able to get reward points, or get a teaser rate at 6% (taking their interest charge down to $$12.375 + 75 = $87.375 Total!)

Bottom line is that interest rates are based on time and are not computed by ignoring the time factor. Interest Charge = Rate x Time x Principal.

$121 = Rate x 3 weeks of a 52 week year x $3300

$121=Rate x 3 x 3300
————————
52

$121×52 = Rate x 3 x 3300
————- ———————–
3 x 3300 3x 3300

(121×52)/(3×3300) = Rate

63.56% = Rate