Community stakeholders and consumer advocates have long argued that high-cost refund anticipation loans (RALs) weaken the capacity of anti-poverty programs to build wealth and alleviate poverty. There is also concern that the wealth-depleting impact of RALs may be greater in communities of color. Refund anticipation loans (RAL) are loans that allow taxpayers to access the proceeds of a tax refund within hours or days of filing their tax return. Although convenient, these tax loans carry significant costs for borrowers, reducing the expected return by up to 10 percent. In 2006, taxpayers spent approximately $900 million on refund anticipation loans. Nationwide, the highest percentage of RAL consumers are taxpayers that qualify for the Earned Income Tax Credit (EITC), the government's largest anti-poverty program. The EITC is designed to increase the income of working families and has been credited with lifting millions of people out of poverty. Using tax return data for tax year 2006 from the Brookings Institution, this report examines recent trends in the use of refund anticipation loans in Illinois among EITC recipients and by taxpayers living in communities of color. Additionally, this report provides estimates for the net aggregate financial loss experienced as a result of RAL fees for these borrowers and in these communities.
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Funded by
- Ford Foundation
- F.B. Heron Foundation
- Chicago Community Trust
- Woods Fund of Chicago
- John D. and Catherine T. MacArthur Foundation
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