2005 GEORGETOWN UNIVERSITY STUDY SUMMARY OUTLINING NEEDS AND USE OF REFUND ANTICIPATION LOANS

Identifying the Need for and Use of RALs

“Consumer Use of Tax Refund Anticipation Loans,” by Dr. Gregory Elliehausen of Georgetown University’s Credit Research Center, is the first significant academic report in several years to take a comprehensive look at refund anticipation loans (RALs). Based, in part, on an in-depth survey, the report provides an objective view of consumer use of and attitudes toward RALs, and sets the record straight on a number of misconceptions about the products.

SOME KEY FINDINGS:

Most RAL borrowers have a legitimate and immediate need for the product.
The report clearly shows that, contrary to the assertions of some critics, most RAL borrowers have a legitimate and immediate need to solve some other financial problem. More than 78 percent use them to pay bills or unexpected expenses, take advantage of a short-term purchase opportunity, or make planned purchases. Much smaller percentages listed “did not want to wait” (less than 15 percent) as their primary reason for taking a RAL.

RAL borrowers are credit-constrained.
While RAL borrowers represent a broad group of taxpayers, many are credit-constrained. They have relatively high levels of existing debt (about 25 percent have serious mortgage or other delinquencies); they are more than twice as likely to have been recently turned down for other credit; they are less likely to have open-end credit cards or, if they do have a credit card, they are more likely to be at or near their maximums; and many do not have bank accounts. All of these factors limit access to more traditional forms of credit. As a result, a RAL may often be the only source of short-term credit for a borrower in need of immediate resources.

Most RAL borrowers know the facts and fees regarding their loans.
The report finds generally high levels of consumer knowledge about the facts relevant to entering into a RAL transaction:

• 97 percent reported knowing that the preparer offered electronic filing
  
• 65 percent reported discussing other options for receiving a refund faster than IRS delivery
  
• 57 percent reported knowing their RAL fee

The report calls into question assertions made by the National Consumer Law Center in 2005 that 70 percent of RAL consumers did not know that a RAL was a loan. Dr. Elliehausen points out that the question was too confusing to elicit reliable answers.

The vast majority of those who obtained a RAL were highly satisfied with the product.
Satisfaction levels among RAL customers are very high — 85 percent were very or somewhat satisfied.

Among the small minority dissatisfied with the product, “insufficient or unclear information” was cited by fewer than 9 percent. This indicates that information and disclosures provided to customers are sufficient in the eyes of those customers for making informed decisions about RALs.