Pay Day Lending Schemes
How to avoid them
by Phil Dyer, MOAA
A landmark Pentagon study released in August 2006 found that the average payday borrower paid $834 for a $339 loan—about $2.45 for each dollar borrowed. Put another way, if you are using payday loans to purchase anything, from groceries to gas to a night on the town with friends, simply multiply the sticker price of the item by 2.45 to get the true cost.
How Payday Loans Work
The transmission goes out on your car, and you need $340 to fix it. It’s been a tough year financially, and there isn’t enough room on the credit cards, so you see one of the dozens of payday lenders that surround many military installations. You provide the lender a postdated check for $400 (or authorization to withdraw that amount from your checking account), and it gives you a $400 payday loan. The lender fee is $60, so you actually receive only the $340 you need to cover the auto repair.
However, you have to pay the entire $400 back by next payday . . . or risk a bounced check and/or overdraft fees. Money is short again, but the payday lender gladly extends you another $400 loan, with another $60 fee (a practice known as flipping).
Now you are trapped in a vicious cycle of debt that is very difficult to break as you go to the lender again and again. That $60 fee represents a 400 percent annual interest rate—the average for payday loans around the country.
Military Service Members Are Easy Targets
Gainfully employed, drug free, subject to harsh penalties for failing to meet financial obligations but often financially unsophisticated, service members (especially enlisted and junior NCOs) are prime targets for thousands of payday lending operations surrounding military installations nationwide.
The numbers compiled by the Center for Responsible Lending (CRL), a not-for-profit research organization dedicated to eliminating abusive financial practices, are sobering:
- Active-duty military personnel are three times more likely than civilians to take out payday loans.
- One in five active-duty military personnel use payday loans.
- Predatory payday lending costs military families more than $80 million annually.
- Ninety-nine percent of payday loans go to repeat borrowers.
- The average payday borrower is flipped eight times by a single lender.
The Uniform Code of Military Justice is unforgiving of failure to meet financial obligations. Deep debt can cost service members promotions and their security clearances (approximately 5,800 lost in 2005), and can lead to a variety of other administrative punishments.
Help May Be Coming
Although payday lending is banned in some states, the Pentagon report recommended that Congress take immediate legislative action to curb these abusive lending practices on a national level. These recommendations include:
- Cap annual interest rates at 36 percent.
- Prohibit loans secured by personal checks or car titles.
- Prohibit forcing service members to waive legal protections.
The payday loan industry will fight hard against these and other restrictions, but consumer and military groups like the Consumer Federation of America and the Military Officers Association of America have joined forces with the CRL to fight for service members and to end these abusive and costly lending practices. At this writing, anti-payday lending bills are pending in Congress.
Payday Lending Alternatives
The military has many resources through Military OneSource (www.militaryonesource.com or 800-342-9647) and www.USA4militaryfamilies.dod.mil to help service members avoid payday lending scams or get out of debt if they have already become victims. In addition, the CRL’s Web site (www.responsiblelending.org/issues/payday) offers many excellent tips and alternative sources of emergency funds.