DoD’s Proposed Interest Rate Cap Strengthens Case for Payday Alternatives

Because they believe that predatory lending is weakening the military, the Department of Defense is proposing a 36 % interest rate cap on loans to service members. This decision has implications beyond the military.


The Department of Defense (DoD) recently released a report on predatory lending directed at service members. According the report, payday lending costs military families more than $80 million every year in fees alone. Furthermore, payday lending undermines military readiness and harms the morale of troops and their families. The DoD is calling on Congress to cap the annual interest rates for military borrowers at 36%. This cap would include all extra fees, charges, and products such as credit insurance premiums.

The DoD’s report was released in response to the US Government Accountability Office’s study on predatory lending. The study showed that the DoD’s tools to combat predatory lending - relief programs and financial counseling - were ineffective and not properly enforced. It is difficult to restrict payday lenders’ activities as long as they operate within state laws. Not all states have strong usury laws, so the DoD, along with a coalition of 70 consumer and veterans groups, support an interest rate cap.

Why Service Members

The Center for Responsible Lending estimates that active duty military personnel are three times more likely than civilians to have taken out a payday loan. The DoD estimates that 17% of military personnel use payday loans. Soldiers are ideal targets for payday lenders because they are young and financially inexperienced. They earn a steady income from a reliable source and are unlikely to be downsized or outsourced. In terms of targeting, there are clusters of check cashing stores at many military bases around the country, as active duty personnel are concentrated around the bases. Ultimately, payday lenders target the military because they are certain that military borrowers will not default on a loan because they could face severe consequences such as loss of security clearances or court martial.

What is proposed?

The proposed federal ceiling would reduce the cost of credit to military borrowers to prevent lenders from imposing usurious/ excessive rates. Payday lenders charge high fees and usurious interest rates, which make borrowing extremely expensive. For example, a $100 payday loan for two weeks with an interest rate of 400% would cost $16 over the period. With a 36% interest rate cap, this loan would cost $5.60.

An Opportunity to Grow Payday Alternatives

Though an interest rate cap may limit the availability of credit to some military personnel, it would send the message that high-interest loans are not the best solutions to a financial emergency. Additionally, it would limit the availability of loans made to people that are unable to repay. The proposed interest rate cap would decrease the profitability of payday lending, hopefully leading to a decline in predatory lending that targets service members. Additionally, this initiative could increase the number of consumers that turn to payday alternatives.

Many credit unions already offer alternatives to payday loans that have lower interest rates and better repayment terms. According to Rich Alfirevic, executive vice president and chief operating officer at Vystar Credit Union ($3.0 billion in Jacksonville, FL), “Credit unions need to look at their membership and offer products that help our members.” Vystar offers a Pay & Save Loan program where one can borrow up to $750 for six months at 14% APR. Langley Federal Credit Union ($1.1 billion, Newport News, VA) provides service members with emergency loans through their Quick Cash program. In Ohio and Washington, credit union groups were formed to combat predatory lending.

Credit unions need to offer payday alternatives as well as financial counseling to protect their members from abuse at the hands of payday lenders. By offering more consumer friendly payday lending alternatives, credit unions can continue to differentiate themselves from other financial institutions by showing that the welfare of its members is more important than profit.

For more information on other strategies being used to address the payday lending issue, check out Alternative Payday Lending: Fulfilling the Credit Union Mission, a webinar recording brought to you by Callahan and Associates.




Aug. 28, 2006


  • I worked for a large bank for several years processing a variety of loans. One thing I learned is most people do not really understand how APR works. APR does not help people accurately depict the cost of the loan. You used the example of a $100 loan at 400% APR only costing $16 in interest. Pretty easy math; the cost of the loan is only 16%. A $135,000 home loan at 6.25% APR will cost $165,000 in interest. The cost in interest is 122% of the loan. APR looks great when measuring the interest you will pay for a large, long term loan, but only scares and confuses most people when using it to measure the cost of a small loan. I have used small loans like this several times and have been very satisfied. Without access to small loans I would not have been able to purchase food or other necessities for weeks at a time. I do feel there are unethical lending practices by many small loan companies that need to be addressed. Targeting and eliminating these practices and educating people on smart financial decisions should be our focus. A 36% cap on APR would not be a good fix. It would eliminate options for many people who are not rich or have the best credit to access funds when they need it. It would eliminate options to build credit and improve financial futures for many people who are unable to access banks or credit unions. It would eliminate thousands of jobs, millions of dollars and would devastate the economy. Let’s look for solutions that would target the real problems, help the economy, and not eliminate options that benefit many people.
  • A Federal usury cap corresponding to the DOD's cap is long overdue.
  • Concise, well articulated and spot on. I have researched this subject matter previously and i concur with the author of this article.
  • Article ignores the fact that bank NSF fees are the real problem, not payday lenders. Also, why is the media pushing for a socialist government. Big brother government is never good for its citizens. DOn't you guys study history?