Military Payday Loans

Military payday loans have been a hot topic since 2006-2007. Payday loans are short term loans that involve quite high fees and payments. For example, in a typical payday loan transaction, the borrower can borrow $300 for two weeks (until their next paydate). The fee for the short term loan? Up to $90. Pretty expensive!

Military members were often big users of these short term loans. And payday lenders loved working with military borrowers — military personnel get paid on a regular basis, and have a predictable source of income. Good for the lenders. Bad for the military.

In 2007, Congress passed a law based on a bill introduced by John Warner (called the “John Warner National Defense Authorization Act for Fiscal Year 2007″). The law effectively made it illegal for payday lenders to issue military payday loans (or military car title loans).

The law makes it illegal for payday lenders (and other lenders for that matter) from charging more than 36 percent interest to military borrowers. Fees, service charges, renewal charges, credit insurance premiums or any other product sold with a military loan must be included when calculating the interest rate.

The law has effectively closed down military payday loan operations around military bases. The law also makes it illegal for payday lenders to lend money to military members or their families using a check, or any other means of access to a financial account, as security for the loan. (a typical technique used in military payday loans).

The new law took effect on October 1, 2007. Lenders who violate the provisions of the law are subject to a fine and up to one year in prison.

Here are a few details about what the law prevents:

• Requiring military members to set up an allotment as a condition of receiving a loan.
• Requiring the use of a vehicle title as security for any loans made to service members and military family members.
• Using a check or any other access to a member’s financial account as security for a loan.
• Lenders are prevented from renewing, repaying, refinancing, rolling over, or consolidating consumer credit using the proceeds of other credit granted by the same lender to the military member.