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Alternatives to payday loans for the military

As a Command Sergeant Major, I knew of Soldiers who fell for an "easy" solution with payday loans. I knew about the devastating consequences these loans can have on military families — how service members get trapped in an endless spiral of debt. And it's easy to see how it happens.

Whether it's for car repairs, travel, or other unexpected bills, when consumers need immediate money their options are often limited. For service members, the choices can seem even fewer due to time constraints, lower-than-average pay, and a mobile lifestyle caused by deployments, training, and frequent moves.

These conditions have traditionally meant that Soldiers, Sailors, Airmen and Marines have to borrow money. Since it's often hard for them to obtain traditional financing, many military families use a credit card, borrow from family members, or get a payday loan.

Credit cards, while convenient, can often take years to pay off if the consumer only makes the minimum payment. Borrowing from family members can cause undue stress at home. Payday loans offer short-term money, but the result can often lead to rollovers or the beginning of a long-term debt cycle.

Payday loans, which charge from $15 to $30 per $100 loaned, have major drawbacks, as noted in studies by the Center for Responsible Lending (CRL).

  • When factored as an annual percentage rate (APR), the fees are 390 percent or more. Based on briefs by CRL, the average payday borrower pays $800 to borrow $325.
  • A payday loan can be "rolled over" or "flipped" if it cannot be repaid, increasing the effective APR and starting a dangerous cycle of debt.
  • Most payday loans do not take into account the customers' ability to repay the loan.
  • The short duration of the loan, usually two weeks, does not allow the consumer enough time to save the money to pay off the loan.

According to one CRL study, active-duty military personnel are three times more likely than civilians to use a payday lender, and one in five used the service last year. The study also notes that this costs military families more than $80 million a year in fees.

While several states are looking to control the rates and amounts loaned by payday lenders for everyone, there is now federal legislation to regulate loans made to service members. Known as the Servicemembers Anti-Predatory Lending Protection Act, the bill caps the annual percentage rate on loans for service members at 36 percent and prohibit automatic rollovers.

In response to the proliferation of payday loan products, several agencies, finance companies and banks have developed responsible alternatives for immediate cash needs:

  • There are emergency relief funds offered by on-installation agencies that provide interest-free loans with approval from a commanding officer.
  • The Pentagon Federal Credit Union offers short-term cash advances for a small fee and an agreement that the service member will get credit counseling.
  • The Navy Federal Credit Union offers a line of credit that requires a monthly minimum payment.
  • Pioneer Services, a financial solutions provider that works exclusively with the military community, offers a $500 HELP Loan that features repayment in four equal installments and a total cost of $25.
  • Pioneer Services also offers the NewPath Loan, a one-time $1,000 loan that includes a $50 reward in a savings account for paying off the loan on time.

In addition to offering a more responsible solution to paydays, companies are beginning to focus on financial education. Many financial institutions realize that education is the proactive solution to keeping military families out of harmful debt. The Department of Defense is also looking at increasing financial education efforts for those who serve.

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