If you’re not familiar with the controversy over payday loans, let me sum it up this way: their opponents call the practice “predatory lending” for a reason. Double-digit or even triple-digit interest rates mean that borrowers are often taking out new loans simply to pay the fees on previous loans. And it’s a cycle that can last for years.
Lenders claim they offer a much-needed service to people who otherwise wouldn’t have access to traditional credit, however, so the battle goes on. But there’s a new battleground in this war – on military bases.
PayDay Lenders Ripping Off Our Troops?
Service men and women are prime customers – or targets – for payday lenders because they have a guaranteed paycheck from the military. And in many cases, they can arrange to have the loan’s interest deducted directly from a borrower’s paycheck. That’s what happened to Petty Officer First Class Kelly, profiled in this New York Times’ Dealbook piece.
Congress noticed that military members were falling victim to predatory lenders some seven years ago, and passed the Military Lending Act in 2006. The act put a cap on interest rates on loans tied to a service member’s next paycheck.
But the law only covered a narrow class of loans, leaving loopholes big enough to drive a tank though:
The short-term loans not covered under the law’s interest rate cap of 36 percent include loans for more than $2,000, loans that last for more than 91 days and auto-title loans with terms longer than 181 days.
And an increasing number of payday lenders are creating loans that circumvent the law. They aggressively court military customers, set up shop near bases, give themselves patriotic names, and host information sessions replete with hot wings.
For a military family struggling with a sudden expense like a move, that’s hard to turn down.
High Interest Rates Have High Costs for Military Members
Unfortunately, many service-members use these payday loans to buy electronics, and don’t realize that patriotic name or no, that loan comes with an 80% interest rate (which is a good five times higher than a credit card).
And once they’ve signed the paperwork, they can say goodbye to a significant portion of their paycheck for a long time.
Military-focused loan companies encourage borrowers to pay back through an “allotment” – or automatic payroll deduction.
Can’t make the payments? The consequences are even worse for military personnel than the average person:
Shouldering the loans can catapult service members into foreclosure and imperil their jobs, as the military considers high personal indebtedness a threat to national security. The concern is that service members overwhelmed by debt might be more likely to accept financial inducements to commit espionage.
If you thought a black mark on your credit report was bad enough, try a black mark on your military record. And lenders don’t hesitate to threaten borrowers with a bad word to their commanding officers.
Always Read the Fine Print
While these high-interest payday loan lenders may not be an outright scam (their terrible loan terms are right there in black and white) their patriotic branding “can lull service members into believing that the loans are friendlier for the military.” And aligning your service with a trusted government institution is a classic scam technique.
Everyone, military and civilian, can benefit from doing the math before signing loan documents. And if that thousand dollar loan is going to balloon to $1800 of debt in the space of a year, maybe it’s time to look elsewhere.