People short of cash are often tempted by the easy terms of payday loans, car title loans or tax refund anticipation loans without realizing how expensive these quick loans really are. The U.S. Congress has enacted measures to help protect service members and their families from these money traps. Here's what you should know about these types of loans and your rights as a member of the military community.
The Military Lending Act
Recognizing the harm that can result from a service member getting a small, high-cost, short-term loan, Congress passed the Military Lending Act in 2006. The Act limits the fees and interest rates lenders can charge military members and their families for payday loans, vehicle title loans and tax refund anticipation loans. The Military Lending Act caps interest and fees on these loans to an annual percentage rate of 36 percent and prohibits the lender from securing the loan by holding a check, car title or obtaining access to a bank account.
Lenders should present you with a "declaration" to sign asserting that you are a service member or the spouse or dependent of a service member. Lenders who violate the law face criminal penalties and must return the interest that you paid on a loan.
Even though interest rates are capped for active-duty service members and their families, the costs of these loans are still high and can quickly land a borrower in debt.
Payday loans, also called cash advance loans, check advance loans, post-dated check loans and deferred-deposit check loans, may look like a good way to get quick cash between paychecks. But they carry outrageously high interest rates. For a two-week loan of $100, it's not unusual for a lender to charge $15, which comes to about $400 per year. What can seem like an easy way to get cash a week or two before your paycheck can get you in the hole faster than almost any other type of debt.
Getting money through payday loans is like agreeing to an instant, deep pay cut. Too often the borrower takes out another payday loan to pay for the previous one, creating a cycle of debt. The average borrower of payday loans takes out eight such loans in a twelve-month period.
If you take more than a week or two to repay a payday loan, or borrow money this way more than once or twice a year, you are probably setting a course for a downward debt spiral that will be almost impossible to turn around. If your cash didn't get you from one paycheck to the next when you needed the payday loan, it's going to be that much tougher the next time with the added expense of a super-high-interest loan.
Payday loans are worse than a last resort. They're never a smart option. If you have a payday loan, cut expenses or raise money some other way to pay back the loan as quickly as you can. As a service member, you have access to loans or grants from the military relief societies: the Army Emergency Relief Society, Navy-Marine Corps Relief Society, and Air Force Aid Society. In addition, banks and credit unions on your military installation offer low-cost, short-term loans to help you if necessary. Saving for emergencies can also help avoid the risks of predatory lending.
Vehicle title loans
Like payday loans, vehicle title loans are short-term loans that can carry extremely high interest rates. And like some payday loans, they can be traps for people who don't have much money.
With a vehicle title loan, the borrower gives the title of the car and a copy of the keys to a lender as security for a loan. If the borrower doesn't repay the loan or falls behind in payments, the lender simply takes the car, sells it and pockets the money.
The fee for some vehicle title loans can be more than twenty percent of the loan amount per month. So a $1,000 title loan can cost more than $200 a month in interest fees. If it takes you a year to repay, that $1,000 loan will cost you more than $3,800. A vehicle title loan is not the way to get back on your feet if you're having financial problems. It's a trap that's likely to put you deeper into debt, and could also cost you your vehicle.
Refund anticipation loans
Refund anticipation loans are advertised during tax-filing time as a way to get your income tax refund without having to wait the typical 10 to 20 days for the Internal Revenue Service to issue it directly. A tax preparer will file your tax return and loan you the amount of your anticipated refund. The loan becomes costly when you factor in fees and handling charges. An $89 processing fee for a $1,000 tax refund is like paying an APR of 250 percent on your loan.
With free e-filing services available through Military OneSource, the IRS, and Volunteer Income Tax Assistance (VITA) offices on military installations, service members can typically get their full tax refund straight from the IRS within ten days of filing. They should not have to resort to a tax refund loan.
Be a smart consumer
Of course, having a good spending plan and using free financial education programs can help to keep you in the black. As a conscientious consumer, should you have an unresolved issue with a company about a financial product or service, submit a complaint on the Consumer Complaint Database at the Consumer Financial Protection Bureau. This will help protect others, encourage better enforcement of consumer protection laws and better rules and regulations.