Are Military Payday Loans Illegal?

Military payday loans, like all payday loans are small loans ranging from $300.00 -$1,000 that are usually re-paid within two pay periods after its receipt. The purpose of a payday loan is to offer financial assistance to consumers who temporarily need access to money for emergencies.

Payday loans are relatively easy to obtain (Credit checks are not required and most people qualify if they have a checking account and income). Consequently, for this convenience, payday lenders charge higher fees that equate to several times the original loan amount.

Payday lenders require customers to write a personal check to the lender for the amount the customer wants to borrow, plus the fee they must pay. The lender gives the customer the money, or electronically deposits the money into the customer’s checking account, and holds the check until the customer’s next pay day.

Customers may choose to have the check debited on their pay day, or they may extend the loan by paying an additional fee. Although the initial fee may not seem costly, if a consumer continues to extend the loan the APR may exceed 300%. The APR is determined by many factors such as the length of the loan, the interest rate and fees, and the amount borrowed.

Until 2007, many payday lenders were located near military bases and targeted military personnel. Enlisted men and women were particularly vulnerable and easy prey for military payday loans because they earn low wages, and are detached from their network of family and friends. As a result, when an emergency arises, many cannot quickly borrow money from other sources. Consequently, they turn to military payday loans to help cover unexpected expenses. Problems began to arise when many military personnel were unable to repay these loans quickly.

The process of applying for a military payday loan and extending the loan became a cycle for many service men and women. This cycle, according to the Department of Defense, resulted in soldiers who were deeply in debt. As a result, their credit was ruined which threatened security clearances, and jeopardized their ability to be deployed.

In an effort to protect military personnel and their families, a federal law was passed to limit the power given to payday lenders when conducting business with military personnel.

Consequently, in 2007 Congress enacted the Fiscal Year 2007 National Defense Authorization Act. Although the law makes it less profitable to extend payday loans to military personnel, it did not make it entirely illegal.

In fact, as a result of the 2007 legislation, many payday lending companies still specifically target military personnel, but now the rules of engagement have been altered to fit the new law. Most military bases no longer have brick and mortar payday lenders anywhere near the bases. Much of the business is now done online.

Furthermore, when military payday loans are extended to military personnel and their dependents, lenders are required to include certain modifications to protect service men and women. For instance, after October 1, 2007, lenders cannot offer loans to military personnel with interest rates above 36%.

In addition, the 36% interest rate must include all fees associated with the military payday loan such as renewal fees and service charges. Requiring military personnel to provide a security deposit such as a personal check, access to a bank account or a car title is also forbidden

Lenders are also prohibited from unlawfully threatening military customers with legal action, or requiring service men and women to relinquish their rights under the Servicemembers Civil Relief Act through mandatory arbitration.

Finally, creditors must disclose all costs associated with the loan, and inform military personnel of their rights.

Offering a military payday loan is not illegal. However, there are strict guidelines payday lenders must adhere to when providing payday loans to service men and women. If the guidelines are not followed, the lenders may face prosecution resulting in fines or even imprisonment.