We owe a lot to the brave men and women who choose to serve in our country’s armed forces. And now I’m hoping that one recent measure passed specifically to assist military personnel will serve as a template for all consumers.
The 2007 defense authorization bill includes a provision capping annual interest rates on consumer credit loans – including on so-called “payday loans” – to service members and their dependents at 36 percent.
What’s a payday loan? If you don’t know, consider yourself fortunate.
Payday loans are small, short-term, high-interest-rate loans, typically of a few hundred dollars. They go by a variety of other names: cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans.
Under a payday loan, borrowers promise to repay the debt out of their next paycheck, usually in two weeks. They typically write a post-dated personal check payable to the lender for the amount borrowed, plus the fee, or authorize the lender to withdraw the funds electronically. If a borrower cannot repay on time, he is allowed to roll over the loan – for additional fees, of course.
Fees charged for payday loans are usually a percentage of the face value of the loan, starting at about $15 for every $100 loaned. On an annualized basis, the fee charged on these loans can top out at between 400 percent and 1,000 percent, according to Travis Plunkett, legislative director for the Consumer Federation of America.
The payday loan industry has been accused of targeting the military and causing many members of the armed forces to fall into a downward spiral of debt. It’s a claim the industry rejects, arguing that military personnel only account for 1.3 percent of revenue across the industry.
However, a study released by the Defense Department found that military personnel are three times as likely to use payday loans as civilians. Such loans can be particularly problematic and career-ending for military personnel because a poor financial record can result in the loss of security clearance or even a court-martial.
Understandably, at a time when we are at war, this measure is important for members of our armed forces, who should not be worrying about personal debts spinning out of control. But I don’t understand why civilian consumers don’t deserve the same protection. If payday loans are a bad deal for the military, they are a bad deal for everyone.
To get a payday loan, you have to have a bank account. You have to give the lender permission to cash a post-dated check or electronically take the funds out of your account. That means you are giving your creditor direct control over your cash. That is never a good thing.
“It’s just wrong to charge 400 percent, no matter how severe the need is,” said Plunkett. “These loans are inherently abusive whether they are directed at members of the military or the general public.”
Plunkett said that what’s good about this legislation is the fact that interest is defined to include all extra charges and fees of any kind, including the sale of related products such as credit insurance.
The measure prohibits lenders from basing loans to service members on checks written without adequate funds in the bank. It would also bar lenders from arranging loans that give them electronic access on a priority basis to a service member’s bank account or paycheck. Finally, the provision would ban loans secured by a service member’s vehicle. That type of loan is called a title loan.
Like payday loans, car-title loans are marketed as small emergency loans. A typical car title loan has a triple-digit annual interest rate, requires repayment within one month, and is usually made for much less than the value of the car. In a title loan transaction, you keep your car, while the lender keeps the title as security for repayment of the loan. If a borrower fails to repay the loan, he runs the risk of losing his car.
The payday lending industry characterizes the small short-term loans it offers as a financial taxi to help people get from one paycheck to another when faced with an unexpected cash need.
Payday loans are cheaper than bouncing a check or paying a late fee on a credit card, says Darrin Andersen, who is president of QC Holdings, a payday lender, and president of the Community Financial Services Association of America, which represents more than half of the estimated 22,000 payday advance industry outlets.
Most payday customers use the service about six or seven times a year, Andersen said. His company and others are filling a need, he said.
It may be that payday loans are in demand but you can’t base the demand for this type of business on the satisfaction of cash-strapped, desperate individuals.
And to say that getting a payday loan is better than bouncing a check is like saying it is better to smoke one cigarette a day than two. Both are bad for you.
Helping the military steer clear of predatory, high-priced debt is a good thing. It would be even better if the legislation were expanded to include all consumers.
Washington Post Writers Group
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