Mike Saunders is Director of Military and Consumer Policy at Veterans Education Success.
After hitting a recent low, the national unemployment rate is once again a source of major concern for veterans in the job market. And that’s why it’s more important than ever for veterans and military members facing financial difficulties to know the dangers of one easy-seeming financial solution that could bring major problems down the road: payday loans.
The cost of a payday loan is typically $15 for every $100 borrowed, according to the Consumer Financial Protection Bureau, which works out to a 391 percent Annual Percentage Rate (APR). The problem is that approximately 75% of payday loans are taken out by people who have taken out 11 or more loans in a year, and most of them are taken out within two weeks of repaying a previous one. That’s why payday loans are referred to as a “debt trap.”
Worse, veterans seem to take out payday or car title loans at rates far higher than the general population. A 2019 survey in Texas found that 45% of veterans had used payday or car title loans, compared to 7% of civilians.
One reason for this, ironically, may be the success of the Military Lending Act (MLA). Passed in 2006, the MLA caps the APR that may be extended to active duty servicemembers and covered dependents at 36% while also preventing the use of forced arbitration agreements. It is arguably the most successful federal consumer protection law on the books. As data from the Navy and Marine Corps Relief Society (NMCRS) shows, the MLA has decreased the number of active duty servicemembers who need zero-interest loans to get out of trouble with payday loans by approximately 99.8%. NMCRS, along with Army Emergency Relief and the Air Force Aid Society, offer zero-interest loans and grants to active duty servicemembers and military retirees in financial distress.
Veterans, accustomed to the effective, common-sense protection afforded by the MLA, seem to be unaware of the dangers that predatory lenders present to their financial health.
Unfortunately, the U.S. Consumer Financial Protection Bureau (CFPB) has stopped supervising payday lenders for compliance with the MLA, and recently it got rid of the “ability to repay” provision of the 2017 Payday Rule. The new rule scraps the requirement that lenders assess a borrower’s ability to repay the loan. It might seem strange that the CFPB wouldn’t want lenders to consider a borrower’s ability to repay a loan, but unfortunately predatory lenders pay lobbyists who work hard to convince the Administration to help them. They do this because lenders make the vast majority of their money from people who get stuck in quicksand, endlessly taking out new payday loans and hoping for a different outcome.
Roughly 12 million Americans take a payday loan each year, more than half of whom struggle to pay their regular bills. As the economic crisis spins out of control along with the health crisis caused by COVID-19, that percentage is expected to go higher. Our advice to veterans and military families is clear – don’t get caught in a debt trap. If you are facing economic hardship, here are some emergency assistance programs, as well as healthier forms of credit, to choose from:
- Emergency assistance from Veterans Service Organizations like the VFW’s emergency grant program, Disabled American Veterans’ grants for disabled veterans and The American Legion’s emergency financial assistance program.
- Unsecured consumer loans made by banks, credit unions, or other non-bank lenders. Credit Unions in particular offer their members more attractive terms on consumer loans. Federally-chartered credit unions are subject to an 18% APR usury limit, with the exception of Payday Alternative Loans (PAL) that can carry up to a 28% APR.
- Local lending cooperatives or faith-based groups.
- Got student loans? Get free help from our lawyers to reduce or get rid of your student debt. There are several federal programs that most people don’t know about.
- Check out USAA Educational Foundation’s Debt Destroyer videos and CFPB’s blog about how to stay on top of your finances.
- If you’re having problems with a financial product or service, submit a complaint to the CFPB here.
- Veterans Education Success can help you meet with your Congressional representatives and speak out in your hometown news media. Contact us at Help@VetsEdSuccess.org.
Times are tough everywhere in America right now. It is increasingly likely that this will be the hardest winter most of us have ever experienced. Don’t take out a predatory loan and make it worse.
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