Money and Mobility: For Military Personnel and Families
Many off-base check-cashing stores also make "payday loans" to military personnel
and other individuals who work full time. Let’s say you need $100 and go to a
payday lender. Here’s how your loan works:
- You show the store whatever proof they need that you can cover the loan. This can be pay stubs or other paperwork.
- The store asks you to write them a check for around $120 and agrees not to
cash it until your payday.
- You get back $100 in cash. The store keeps the extra $20 as the fee for the loan.
(Most stores charge between $15 and $30 for a payday loan.)
- The store cashes your check on the agreed-upon date.
But, after the time period is up, what happens if you don’t have the money in your
checking account to cover the check you wrote? For a fee, you can extend the loan.
In fact, this cycle usually continues as long as you pay the fees. In time, you could
end up paying anywhere from 450 percent to 650 percent in fees and interest
charges. Why so much? Because many states have no rules limiting the fees these
stores can charge.
You have a far better option than a payday loan: your military relief association.
Each branch of the military provides its servicemembers with emergency relief
through an official military nonprofit organization. Its mission is to help relieve
financial distress for servicemembers in need. Relief services include interest-free
loans or grants, help with medical and dental bills, rent, and child-care expenses.
To find out how you become eligible for emergency relief and what relief services
your branch of service provides, visit:
Navy-Marine Corps Relief Society
Air Force Aid Society
Army Emergency Relief
Coast Guard Mutual Assistance
|Military Lending Act
Oftentimes, unexpected financial emergencies, such as an expensive car or
home repair, force servicemembers to seek sources of quickly available, short-term
loans. To protect servicemembers from predatory lenderscompanies
that sell high-cost, short-term loans and other expensive loan productsCongress passed the Military Lending Act (MLA) in the fall of 2006, and the
Department of Defense implemented it in October 2007. The MLA sets an
interest rate and fee cap of 36 percent of the total loan amountstill an
outrageous cost for crediton these three types of loans:
- Payday loans
- Automobile title loans
- Tax refund anticipation loans (high-cost, 14-day advances on tax refunds)
To put this 36 percent rate and fee cap into perspective, as of November 2009, the average variable rate on credit cards is 11.68 percent, the average nongovernment interest rate for a college education loan is 8.83 percent, and the average interest rate for a personal loan is 12.97 percent. While there may be other fees associated with those loan products, the point is this: a loan rate of 36 percent is very expensive. Before you accept any loan offer, be sure you inquire about its fees, interest rate, and any other costs you can be charged. This information is usually listed in the flyer—in the small print—that accompanies a loan offer.
Important Note: All lenders of these types of loans must disclose, orally and in
writing, your rights before you commit to a credit transaction. This law is an
important step in helping servicemembers take note of financial products that
sound good at first but can cause financial chaos and stress in the end. To help
you get a better understanding of how expensive and potentially damaging
these loans are, check with financial educators at your installation support
centers. Additionally, make a focused effort to maintain your emergency fund
so you can avoid predatory lenders altogether.