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.