Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tax Refund Anticipation Loan (TRAL)

What it is:

A tax refund anticipation loan (TRAL) is a short-term loan from a third party. The loan is collateralized by the borrower's pending tax refund.

How it works (Example):

For example, let's assume that John does his taxes on April 15 and determines that he is going to receive a $2,000 tax refund. He files his tax return but doesn't expect to receive the refund from the IRS for two weeks.

John really needs the money to pay his mortgage, which is due in the next five days. He obtains a TRAL from the company that helped him prepare his tax return. The company, via an affiliate, lends him $1,500 immediately. When his tax refund arrives from the IRS, the whole $2,000 goes to the lender to pay the principal, interest and fees associated with the TRAL.

Why it Matters:

TRALs are very controversial because the fees and interest are often very high. Often, borrowers don't realize or don't understand that paying even $100 for a $2,000 loan equates to a usurious annual interest rate that under other circumstances would be totally unacceptable.