Facts About Refund Anticipation Loans

SANTA BARBARA, Calif.--(BUSINESS WIRE)--With income tax season beginning, many taxpayers are exploring the use of Refund Anticipation Loans (RALs) as a means to obtain the proceeds from their anticipated income tax refund as quickly as possible. Unfortunately, many sources of information on RALs provide an unbalanced representation of their costs and value to consumers. A more balanced presentation of the facts about RALs helps explain why these products are utilized by millions of Americans, and the repeat usage exceeds 70% annually.

A RAL is a short-term loan secured by a taxpayer’s anticipated tax refund. RALs allow consumers to quickly obtain a loan in the approximate amount of their anticipated tax refund – typically within 24 hours of filing a tax return – rather than waiting for the IRS to process their return and remit payment. The RAL is paid off once the IRS issues the income tax refund, which is 11 days after filing on average.

Santa Barbara Bank & Trust (SBBT) is one of the largest RAL lenders in the country. Following is a list of facts about the RALs offered by SBBT through professional tax preparation offices nationwide:

• The average cost of a RAL, which includes a finance charge and account set-up fee, is a one-time charge that represents approximately 3.5% of the loan amount.
• SBBT never charges more than the initial finance charge and account set-up fee, regardless of how long it takes the consumer to pay back the RAL. That means that there will never be any subsequent late fees or added interest on the loan. It is a one-time fee.
• A taxpayer can only get one RAL per year, there is only one payment on the loan, and it cannot be rolled over like a payday loan, so it doesn’t create a “cycle of debt.”
• RAL underwriting criteria is not based on credit scoring, so RALs are available to a far greater number of consumers who might not otherwise be eligible to obtain other forms of credit.
• There are no “teaser rates” or variable rates that re-price to much higher levels in the life of the loan; the customer is informed exactly what the total one-time cost of the loan is at the time of application.
• An unpaid RAL is not reported by SBBT as a delinquent account on national credit reports and does not negatively impact consumer credit scores.
• RALs enable taxpayers to forgo paying the out-of-pocket cost of professional tax preparation, preserving valuable funds that can be utilized for more pressing needs. The cost of the tax preparation is deducted from the RAL provided to the consumer.
• Because it is a loan, the interest rate of a RAL must be expressed in the terms of an Annualized Percentage Rate (APR). To calculate the APR, it must be assumed that the RAL is outstanding for a full year, rather than the 11-day period that the RAL is actually outstanding. It must also be assumed that the consumer continues to pay interest on the RAL throughout the entire year. Accordingly, the one-time fee of approximately 3.5% is multiplied by 32.4 (the number of 11-day periods in a full year) to calculate the APR. This results in an APR of 113%, which creates the appearance of a much more expensive loan than the one-time fee of approximately 3.5% that is actually charged.

Santa Barbara Bank & Trust is committed to transparency and responsible lending. As a nationally chartered bank, SBBT and its RAL lending business are regulated by the Office of the Comptroller of the Currency, an agency of the U.S. Treasury Department.

Santa Barbara Bank & Trust is a division of Pacific Capital Bank, N.A., a nationally chartered regional bank that operates three primary businesses: Commercial & Wealth Management; Community Banking; and Income Tax Refund Products. The Company’s branches operate under the local brand names of Santa Barbara Bank & Trust, First National Bank of Central California, South Valley National Bank, San Benito Bank and First Bank of San Luis Obispo. Pacific Capital’s website is at www.pcbancorp.com