Amy Miller, AFC®
Military Consumer Protection Month is recognized each year in July to increase awareness of the consumer protections in place for servicemembers, Veterans, and their families.
To end Military Consumer Protection Month, we’re looking at predatory payday lenders, their practices, and ways to avoid them.
Despite the lending protections provided by the Military Lending Act (MLA), service members and their families members still fall prey to payday lending. In fact, according to the Center for Responsible Lending, service members are 3x more likely to take out payday loans than civilians.
These predatory lenders target military populations by setting up storefronts outside installations. These lenders have created workarounds and loopholes to circumvent the laws and protections of the MLA.
How Payday Lending Works
Payday lending, also known as a cash advance or check advance loans, payday loans can range from $50-$1,000, depending on state laws, and are typically short-term, extremely high-interest credit lines due to be repaid on the borrower’s next payday.
Repayment due dates can also vary by state, but generally range from 14 to 30 days. At that time, the full amount is required to be paid. This is where the trouble with payday loans usually begins for most borrowers. Borrowers may find themselves in the same financial situation on the due date — short on cash — as they were when they originally took out the loan. Borrowers are then forced to “roll over” or “renew” the loans with an additional fee if they are unable to pay in full. The MLA prohibits this for active-duty members; however, no similar legal protections exist for Veterans.
According to the Consumer Financial Protection Bureau, more than 80% of payday loans cannot be paid back by the original deadline and are followed by another loan within 14 days. It also reports that 99% of payday loans are made to repeat borrowers; only 1% pay the entire loan back and don’t get another loan within a year.
Payday Loans & Credit
Although most payday lenders do not consider credit history or the borrower’s ability to repay before granting a loan, failure to pay can be reported to the credit bureaus and can impact a borrower’s credit scores and future borrowing abilities.
Typically, these lenders will quickly turn a delinquent account over to a collection agency, which then reports to the credit bureaus. When this happens, the negative information can remain on a credit report for 7 years. The collection agency also has the ability to sue for the delinquent balance, which could result in wage or bank garnishments.
Payday Lending Tactics
The true goal of payday lending is for the lender to make as much profit off a borrower as possible. These lenders often use deceptive tactics that take advantage of a borrower’s lack of knowledge about financial products, consumer protections, and laws.
Payday lenders will often charge additional fees on top of interest, misrepresent or downplay fees, charge excessive prepayment penalties, and pressure borrowers to refinance, extend the loan, or add debt to the existing loan, without concern for the borrowers’ ability to repay or the impact to their financial well-being.
Avoiding Payday Lenders
The MLA protects active-duty service members and their dependents from many of these loans; however, as mentioned earlier, many payday lenders have created workarounds to still offer high-interest, short-term, loans to active-duty military and their families.
Predatory lenders promote themselves and their products as simple and easy solutions to financial issues and short-term emergency money needs. In reality, they are debt traps that create further financial issues and barriers for military and veteran families.
Here are a few steps you can take to avoid doing business with a predatory lender:
- Seek traditional banking options first. Many installations have on-base financial institutions that are committed to helping service members and their families. Explore options for small personal loans or secured loans with reasonable and more friendly terms.
- Talk to current creditors. Most offer hardship payment plans that can help reduce monthly payments and possibly pause interest charges and fees.
- Visit the readiness center at the nearest installation or contact Military OneSource to speak to a financial counselor.
- Request assistance from one of the military aid societies:
AMBA and its member banks offer support to our Nation’s Service Members and Veterans by offering services to help them achieve greater financial independence, resiliency, and literacy. Search our membership directory to find an AMBA member bank near you.