Many users simply don't know that the IRS doesn't charge for electronic filings or direct deposits, and that they will usually receive their refunds in full within two weeks.
The loans aren't the only problem, according to the National Consumer Law Center. Americans also spent $360 million in 2008 on what the group considered unnecessary refund products, such as temporary bank accounts offered by tax preparers for a fee of $30 a piece.
RALs allow tax preparers to hide how much they are really charging for tax preparation because preparation fees are usually taken out of the loan in advance, consumer advocates say.
"This is an easy way for them to obscure how expensive tax preparation is because if you don't have to take the money out of your billfold or write a check, you might not notice how much you paid," Fox of the Consumer Federation of America said. "It enables tax preparers to charge a multiplicity of fees and hide what the total cost is going to be."
In some cases, borrowers are drawn to these refund aids because they don't have a bank account, Consumer Reports senior editor Tobie Stanger said. H&R Block even sells a pre-paid MasterCard, the Emerald Card, which gives unbanked customers a way to receive their refunds.
H&R Block spokeswoman Rauber said the card helps customers save check-cashing fees. The card is free as long as customers keep using it, she said. Once it has been inactive for 90 days, however, H&R Block begins deducting a monthly $2.50 "inactivity fee" unless customers cancel the cards.
Companies such as H&R Block, Jackson Hewitt and Liberty Tax are accustomed to fighting off complaints from consumer advocates. All three firms have been sued over RALs, both by state attorneys general and private lawyers.
California Attorney General Jerry Brown won a $1.3 million lawsuit last year against Liberty Tax and settled for $4.85 million with H&R Block over what he called misleading advertising about refund loans.
"Liberty Tax Service's print and television ads misled customers by promising, 'Most refunds in 24 hours,'" Brown said in a news release announcing its victory. "In reality, Liberty was selling refund-anticipation loans, not a tax refund."
His predecessor settled a similar lawsuit with Jackson Hewitt in 2007 for $5 million.
Although H&R Block and Jackson Hewitt did not admit to any wrongdoing in their settlements, the scrutiny from regulators has already yielded some changes.
Many tax preparers have toned down their advertising and cut their prices. An average loan of $3,300 now carries an APR of 72 percent and costs about $65 instead of the $100 charged two years ago.
In addition, increased publicity about the drawbacks of RALs and the growing popularity of volunteer tax preparation networks such as the IRS Volunteer Income Tax Assistance Program have helped to shrink the number of RALs sold each year.
RALs peaked at 12.4 million loans sold in 2004 and fell steadily to 8.7 million in 2007 and 8.4 million in 2008, according to the National Consumer Law Center.
Further declines may be in the offing, Fox of the Consumer Federation of America said, noting that Jackson Hewitt's ability to offer loans recently received a blow.
The U.S. Office of the Comptroller of the Currency prohibited Santa Barbara Bank & Trust, one of the country's largest RAL lenders, from making any loans during the 2010 tax season.