Payday Loan Advice

What is a payday loan? Some 2.5 million American consumers apply for them according to some sources, and the Federal Trade Commission defines these so-called alternative lending products as “…short-term, high interest loans that are generally due on the consumer’s next payday after the loan is taken out.”

If that sounds a bit like loansharking to you, you won’t be surprised to learn that the interest rates on payday loans can be incredibly high. The FTC warns that annual percentage rates on certain payday loans can run as high as 400% according to some sources.

Furthermore, some payday lenders use deceptive marketing and “other illegal conduct” according to the FTC to take advantage of financially disadvantaged consumers–including veterans, active duty military, and their family members.

Are Military Communities Targeted By Payday Loans?

Judge for yourself, and remember that not all predatory lending products are identified as payday loans. Some may call themselves a “tax refund loan” which can be predatory depending on the specific terms and conditions of your loan. A non-bank check-cashing service may charge you a higher fee to simply claim your money than if you had just used your bank, etc.

In 2018, the publication American Banker cited a study by Javelin Strategy & Research that included the following statistics:

• 44% of active duty military members received a payday loan the previous year
• 68% obtained a tax refund loan
• 53% used a “non-bank check-cashing service”
• 57% used a pawn shop

Compare that to the Javelin finding that only 10% total (of all American consumers) got one of these “alternative financial products” the year prior to the report. Draw your own conclusions here about whether military communities are targeted by payday lenders or not.

How Payday Loans Work

One of the “big three” credit reporting agencies, Experian defines how payday lending works. The first thing Experian points out is that payday loans are not consistent from state to state due to variations in state law.

That means you might (and the emphasis here is on might) actually have a favorable experience with a not-so-horrible payday loan in one state only to get badly burned by the terms and conditions allowed in a different state.

What does Experian say about payday lending? You apply for credit with a payday lender, and once approved for the loan you’ll be paid electronically or by cash/check. “You’ll then need to pay back the loan in full plus the finance charge by its due date, which is typically within 14 days or by your next paycheck”. And Experian warns that this comes with a finance charge based on the loan amount and there is, as mentioned above, an extremely high Annual Percentage Rate. These loans can range from $300 to over $1000.

In many cases the payment may be a single payoff amount, or you may be able to make installment payments. But over the course of a year the costs of those installment payments can ride up to nearly half the original value of the loan.

If you applied for a $1000 loan and took a year to pay it back you could wind up paying $400 for the privilege.

It is extremely important to read ALL the fine print when applying for a payday loan, tax refund anticipation loan, etc.

Why? You may find that there are stiff penalties for making mistakes with your loan. You may find that payday loans thrive because of “gotcha” rules like a penalty for early payoff of the loan, or excessive fees for each day of late or missed payments. If you fail to read all the terms and conditions, you will likely get burned by something you didn’t know about.

What You Need To Know About Payday Loans

Why are payday loans so easy to get? Because, as Experian.com reports, your payday lender may require you to fill out an application form but may not run your credit. In those cases, your credit score is not hurt by applying for the loan.

But that is NOT a good thing, because your credit score IS affected by delinquency on a payday loan. You WILL be reported to the major credit agencies for not paying off the loan, for being delinquent, being late, or violating the terms and conditions of the loan.

Add to that the potential of a “rollover loan” where the payday lender automatically extends a loan into a new term if the expiration date comes and goes and the loan isn’t paid in full and you have the potential for a situation where you are in perpetual debt with that lender.

The going advice (see below) is for military communities to avoid payday lending like the plague. For those brave enough to apply for such a loan even after all the warnings, you should know how military communities are protected under the law where these financial products are concerned.

Payday Loans And Your Rights Under The Military Lending Act (MLA)

The Military Lending Act is a federal consumer protection loan for active duty servicemembers, those in the Guard and Reserve who are on active duty, plus spouses and “certain dependents”.

Among your protections under the MLA, there is an interest rate cap of 36% (referred to as a “Military Annual Percentage Rate” or MAPR), which includes credit insurance premiums and certain other expenses.

Under the MLA you cannot be required as a condition of your payday loan to waive your legal rights under the Servicemembers Civil Relief Act. You also cannot be required to set up an allotment from a military paycheck to pay back the loan.

There are no mandatory penalties allowed under the MLA and you cannot be charged a penalty for early payoff of the loan.

A 2015 update to these laws added more protections to include expanding the program rules to specifically address payday loans, deposit advance loans, tax refund loans, and certain installment loans.

Your protections under these laws may not be automatic–you will need to learn how to claim the specific protections you seek (usually in writing) and where to submit them. Your payday lender may have this information, but given the nature of the industry you would be foolish to leave this important step up to them to tell you when it comes to claiming your rights.

Alternatives To Payday Loans

A lot of financial bloggers, writers, and federal government consumer protection agencies warn consumers against applying for any form of a payday loan. And that is GOOD ADVICE. Military members can consider requesting advance pay that is basically an interest-free loan from the government repaid by allotments from your monthly pay.

Another way to get credit is to apply for a secured credit card which requires you to put a deposit on the card ahead of any spending. Personal loans from a reputable lender or financial institution are also a better option than payday loans, refund anticipation loans, etc.

Military families in financial trouble should discuss their needs with a service-specific relief society such as the Navy Marine Corps Relief Society or the Air Force Aid Society. And there are plenty of veterans service organizations that can help families with qualifying circumstances such as the DAV, AmVets, etc.

You can also check out local charity organizations and non-profit agencies, and there may be a local medical bill relief program near you. Veterans and family members should also explore state and local government official sites for information on outreach, financial relief, and assistance with housing for those in the local veteran community who need help in those areas.

Experian.com advises that some major credit card companies including Mastercard offer credit card options for those with low credit.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News