Predatory Payday Lenders Impacting War Effort & Getting Government’s Attention

Payday loans are a bad deal. The average interest rates for these loans typically range from 400% to 650%, and can run significantly higher than that. But when people need money to pay the rent or feed their children, the last thing that they are thinking about is what a loan is going to cost them. They are just happy to get their hands on some money. Unfortunately, payday loans can lead to a cycle of ever increasing debt, with no end in site with financial ruin as the end result. Until recently, the federal government had done little to regulate payday lenders. But surprisingly, they are now impacting America’s war effort and that is bringing some much needed regulatory attention to them.

 

Payday loans have become big business. The first Payday lenders opened up in 1993. Within ten years, the government estimated loan volume for the industry had grown to more than $40 Billion annually, and there are now more that 22,000 payday loan stores in the United States. Added to this are a wide range of internet payday loan providers. Many of these operate off-shore and will never be subject to government regulation.

 

A typical loan will charge anywhere from $15 to $20 for every $100 that is lent. The repayment term is normally ten to 15 days – the amount of time between normal pay checks. But lenders will often extend payments or allow a loan to roll over.

 

For example, let’s say that someone takes out a $500 loan for an initial 10 day period. That person would be required to pay back $575 at the end of the loan. But if instead of paying back the loan the person extends it for another two weeks, $661.25 will be the amount needed for repayment. If the loan gets extended out for another two week period, it will require $760.44 to repay the initial $500 loan.

 

It is easy to see how once someone falls into the payday loan trap, they may find it difficult to get out.

 

To make matters worse, not everyone who takes out a payday loan is using the money for food or to keep the roof over their head. The number of payday loans given out jumps dramatically during the Holiday season. In December of 2003 alone, there were more than 10 million new payday loans issued.

 

But as bad as the industry is, the federal government has failed to regulate it. Some states have stepped in and started issuing regulations of their own, but the federal government has not wanted to enter the fray. But that is changing, and for reasons that you may not expect. Payday loans are now affecting US military troop rotations overseas.

 

Although Congress has done a very poor job of passing laws to protect the general public from predatory lending practices, the military has its own rules and regulations. One of those rules that any service member who has short term debt in excess of 30% of his or her annual income can not be sent overseas. This type of debt includes credit cards, car loans and payday loans, but not home mortgages.

 

The reasons for the regulation are fairly simple. Nearly every case of military espionage that has taken place has involved people who are heavily in debt. Therefore the armed forces want to limit the exposure of any heavily indebted service members to overseas assignments that might provide illegal but tempting new income opportunities. Just as importantly, the Pentagon accurately believes that heavily indebted employees may be distracted employees. In a war zone distractions such as this can lead to injury, and even death.

 

Unfortunately, the military doesn’t pay its lower ranking members very well. New enlistees and lower ranking enlisted personnel are often the most vulnerable because they may be overextended and underpaid. They are perfect candidates for payday loans.

 

The statistics support this theory. Last year, 20% of active duty personnel used a payday loan provider at least once. And nearly 25% of those people took out payday loans 13 times or more during the year.

 

The problem for the military is compounded even further due to the country’s current war efforts in Iraq and Afghanistan. Many reservists and National Guard members have been place on active duty, leaving behind much better paying civilian jobs. Unfortunately for them, the bills that they accumulated in civilian life must still be paid. If they no longer make enough money to pay those bills, payday loans may look like a short term alternative. The reality is such loans are more likely to increase their long term debt burdens.

 

The end result is that the armed forces are now facing a crisis. Roughly 17% of those on active duty right now have too much debt to be eligible for overseas duty. This has led to a full scale investigation of payday loans by the Pentagon, and proposed legislation by Congress.

 

Unfortunately, the proposals currently being examined by Congress are only designed to help out the armed forces. They include capping annual interest rates for payday loans to military personnel at 36% and limiting the amount of money that can be lent to a maximum of $500.

 

The reality is that loan sharks often provide better lending terms that payday loan providers. These lenders do long term damage to the economy in general and to all people who fall into their trap. It is time for Congress to step up to the plate do what they are actually paid to do. They need to regulate this industry for everyone regardless where their campaign donations are coming from; not just for the military.

 

ACCESS advises its readers to avoid payday loans. This is especially true as the holiday season approaches. Not overspending on gifts is the best holiday present that you can give to yourself and your family.

 

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