It can start out with just a small $200 loan till your next military paycheck; but the downward spiral begins when a military family starts the next military pay period in debt. Military family finances, credit ratings and debt management can all be easily and quickly destroyed with one payday loan.
The military may actually be at the leading edge of a national movement by creating regulation aimed at protecting military servicemembers from turning financial problems into financial crises.
In 2007, the Defense Department set up protections for military servicemembers against high-interest payday loans that are tempting, but can lead to a dangerous cycle of debt for military families struggling to regain financial control in this economy.
The regulation included in the 2007 National Defense Authorization Act limited the annual percentage rate on payday loans, vehicle title loans and tax refund anticipation loans to 36 percent, for active-duty servicemembers and their families.
This was a significant move, as unchecked interest rates on "predatory" loans could run as high as several hundred percent. With interest rates that can cost 100 percent or more of the original loan, troops and their military families can easily fall victim to a degenerative cycle of payday loans as they continually compound the problem and come up short for bills and payments to payday loans.
The 36 percent interest limit includes all fees and charges, and prohibits contracts requiring the use of a check or access to a bank account, mandatory arbitration and unreasonable legal notice. The regulation also makes it a criminal offense for lenders to knowingly charge a higher interest rate to military servicemembers. To assure this protection, it is essential that military members be honest about their status when applying for loans.
Military commanders also find it problematic when military servicemembers get in over their heads financially, finding that servicemembers worried about financial situations are often not as well focused on their military mission.
In a further attempt to curtail payday loans, the Defense Department also educates servicemembers about financial planning and where to get positive financial help, like applying to their own bank or credit union for military loan products; reaching out to military aid societies; and contacting military family community support centers. If you are a military servicemember in debt, know that most agencies including the Internal Revenue Service often are willing to defer payments or make payment arrangements to support your repayment of your debt without compounding the problem.