Does a Refund Anticipation Loan Affect Your Credit?

Tax preparation companies earned more than $600 million off of taxpayers in 2009 from fees for loan servicing, according to Consumer Federation of America and the National Consumer Law Center. Although the CFA and NCLC consider refund anticipation loans predatory, the loans have the benefit of being unlikely to affect your credit rating.

Identification

A refund anticipation loan, or RAL, does not affect your credit because it is not an actual loan, but an advance on your refund. The tax preparation firm does not care whether you are a good or bad credit risk. In the past, tax preparers pulled a debt indicator report from the federal government to determine if the IRS would offset your refund check, but the IRS stopped this practice in 2010. A debt indicator does not affect a credit rating, either.

Potential

You might end up with a smaller than anticipated refund if the IRS discovers a mistake with your return and adjusts your refund. If the remaining refund cannot repay the anticipation loan, you will have a negative balance with the tax preparer. If you cannot repay the loan, the firm can send the delinquent debt to a collection agency or sue you -- both options can damage your score by 100 points or more.

Predatory Lending

Tax refund loans have one of the highest annual percent rates of any type of loan. The average RAL has an APR in excess of 24 percent, according to Rachel Ochman of SmartMoney. If you are considering this type of loan, you might have financial problems, such as defaulted loans, that hurt your credit. Alternatively, you might not have a checking account or any creditable accounts that would boost your credit rating to provide alternatives to the RAL..

Tips

Modern technology has improved refund processing so much that anticipation loans are obsolete, according to Kay Bell of Bankrate. If you E-File your return, which you can do for free, and provide your bank account information for a Direct Deposit, you should receive your refund within two weeks. You may have other, less expensive options to a RAL available to you, such as a credit card.