Credit Infocenter

Predatory Lending Practices Are Hurting Our Troops

Written by: Kristy Welsh

Last Updated: July 19, 2017

Millions of Americans have financial difficulty, but for men and women in the service, trouble making ends meet is compounded by a direct threat to their work. Finances for many military personnel are a month-to-month struggle. Deployments, relocations, and more can make this situation much worse for military families. Even by cutting corners, buying only necessities, and carefully budgeting income and expenses, many households are just one emergency or expense away from a financial crisis.

Payday loans can be a quick solution to this need for short-term financial assistance. However, the high fees and structure of these loans can turn them into a debt treadmill. One loan often turns into multiple rollovers, and you find yourself paying hundreds or thousands of dollars more than expected. In the end, they are often a more serious problem than the one they were meant to solve.

The security clearance that millions of military personnel need to do their jobs is revoked if they fall into delinquent or excessive debt. That's because it is in direct violation of the Uniform Code of Military Justice, which requires military members to pay their debts. Thus, payday loans and title loans are particularly attractive to service men and women, as they offer immediate, discreet solutions for trouble making ends meet. 

What is the Military Lending Act?

The Military Lending Act was passed in 2006 to protect service men and women from predatory lending practices. In particular, the law caps the annual percentage rate at 36 percent for military personnel who take out payday loans and car title loans (as well as tax refund anticipation loans).

How Have Lenders Responded to the Military Lending Act?

Rather than discontinuing loans to service men and women, payday and title loan lenders have simply tweaked the specifics of their loan terms so as to fall within the legal limits of the Military Lending Act. Since the legislation only applies to payday loans 91 days or less and title loans six months or less, lenders have simply extended the length of their loans accordingly.

What is the APR Charged For Payday Loans and Title Loans?

Though it varies by state, the annual percentage rate for payday loans and title loans can be as high as 400 percent. Again, the Military Lending Act was intended to limit this rate to 36 percent on payday loans and title loans, but lenders have found ways around this simply by extending the length of their loans. Unbelievably, this means a loan of just a few hundred dollars can end up costing thousands to pay back.

What Alternatives do Military Members Have to Payday Loans and Title Loans?

The military offers financial assistance at low interest rates to those in need, but considering the potential for revocation of security clearance, service men and women are understandably leery of pursuing this option. Another alternative is a third-party financial counselor, such as VeteransPlus, a non-profit that offers advice and resources to military personnel.