A law has been enacted intended to help protect military families from the extremely high interest rates payday lenders charge for short-term loans. The new law will cap interest rates set by payday lending companies for military borrowers and their families at 36 percent. Payday lenders, many of whom set up shop near military bases across the U.S., can charge up to 1000 percent interest on two-week loans. Such loans can catch borrowers in an extremely expensive cycle of debt that it is also extremely hard to get out of.
The new law was passed in part due to a growing concern that soldiers are unable to get security clearance, or are losing, their security clearance because of massive personal debt they got into using payday lenders. Without security clearance soldiers cannot be deployed for active duty combat. The Department of Defense estimates that one out of every five service members has used payday lending services, paying more than $80 million in fees. The nonprofit organization Center for Responsible Lending found that the average payday borrower paid $827 back on a $339 loan. Critics have charged that payday lenders unfairly target military service members who are typically young and financially inexperienced.
How Payday Loans work
Payday loan companies are businesses that "advance" money to customers against their paycheck. The technical banking term for this type of transaction is called a "short-term deferred deposit loan." A pay day loan is made using the customer’s personal check as collateral – meaning that the customer writes a personal check made out to the company for the amount of the loan, sign and postdating it for their payday – or within 14 days.
When the loan becomes due at payday, the payday loan store attempts to cash the check that was written for the loan amount. But if you have borrowed against a paycheck that you haven’t even gotten yet, you are likely to have difficulty coming up with the extra cash on payday beyond your paycheck to pay off the loan. So because many borrowers who go to pay day loan companies don’t have enough money accumulated to cover the cost of the loan they took out, the check bounces. Now the customer incurs a bounced check fee from the payday loan company, an insufficient funds fee from their bank and the loan is still due—with interest. In order to not default on the loan, the borrower/customer will have to pay to extend the loan another 14 days. Most stores will now automatically extend/renew loans every pay period (or 14 days) –which can seem like a convenience for borrowers, but actually can easily trap customers in a spiraling circle of debt accumulating without realizing it because no additional paperwork is needed to extend the loan. According to the Colorado chapter of PIRG (Public Interest Research Group), the typical payday lender charged consumers an Annual Percentage Rate (APR) of 470% and an average fee of $18.28 to borrow $100 for two weeks.
Other Sources of Financial Help for Military Families
Military bases are trying to encourage service members to get financial counseling assistance and to apply for longer-term interest-free or low-interest rate loans from their on-site credit unions instead of using payday lending services. If you, or a family member, are a military service member, consider contacting either your local family support center or your branch’s credit union to learn more about financial education services (such as classes in budgeting, debt management plans, saving and investing, etc.) and affordable loan options.
To learn more about how payday lending companies work and what alternatives you might have to using a payday loan company, click here.
