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This article is meant for everyone. If you’re a junior enlisted person or junior officer, please share this with a friend. If you’re a leader of junior troops, feel free to use this article as a set of talking points for your one-on-one sessions.
The focus of this article is to protect our junior personnel, many of whom may still be trying to get a handle on the responsibilities that military life hands them after high school or college.
My Payday Loan Story
Before I get too far into this article, I want to tell you a story. About 10 years ago, I was leading a group of Sailors on sea duty. One of my Sailors had just missed a two-week ship’s movement (kind of a big deal in the Navy), and I was sitting down with him to get some more information on what happened. Below is the conversation:
Me: “Why did you miss ship’s movement?”
Sailor: “I overslept.”
Me: “Why did you oversleep?”
Sailor: “I was up late working the night before.”
Me: “I let you off work at 1630.”
Sailor: “I meant my second job.” (Sailors aren’t supposed have second jobs without permission)
Me: “Why do you have a second job?”
Sailor: “To pay off my car loan.”
So the conversation went. Turns out he had purchased his car two weeks ago from a lemon lot dealer, and the car had already broken down, so he was still hitching rides from co-workers. However, the worst part was that when we calculated his APR (annual percentage rate), it was 65%! That’s right…65% per year.
This is called predatory lending, and I wrote a letter to my then-senator, Sen. John Warner, who had actually introduced legislation to protect military personnel from predatory lending. This legislation, introduced in 2006 as the “Military Lending Act,” limits the APR on loans to 36% per year. While this isn’t as egregious as 65%, let’s be clear—it’s still pretty bad. In 2015, Defense Secretary Ash Carter expanded the application of this rule, which became effective October 1. Although you can find SECDEF’s original statement here, below is a summary:
- Expands the 36% APR limit to include interest, fees, and charges such as ‘credit protection.’
- The 36% APR limit applies to ‘any open or closed-ended loan within the scope of the regulation, except for loans secured by real estate or a purchase-money loan, including a loan to finance the purchase of a vehicle.' This includes payday loans.
It also prohibits creditors from requiring servicemembers to do things such as:
- Submit to mandatory arbitration rules (basically signing away any right to sue in court)
- Waive their rights under the Servicemembers Civil Relief Act
- Provide payroll allotments (other than from non-profit relief societies, such as Navy/Marine Corps Relief Society)
- Submit to a title loan
- Allow the lender access to their bank account
While this legislation & policy decision does a lot to protect servicemembers, you need to know that predatory lenders will always find a way around these rules to take advantage of unsuspecting or uneducated people. The most vulnerable also happen to be our junior enlisted personnel. Here are a couple of payday loan guidelines that you can over with your folks to make sure they don’t become victims of predatory lending:
We've all heard of payday loans, and how bad they can be. The above story indicates the lower end of how much interest you can expect to pay…some payday lenders end up packaging loans so they result in 300-400% interest rates. These loans are specifically designed to keep people perpetually paying interest with no hope of every paying off the loan.
What Can We Do About Payday Loans?
Educate yourself. While it might not be practical to try to learn everything at one time, you should at least learn the basics of personal finance, such as:
- How payday loans & credit cards work
- Managing your monthly cash flow
- How to pay down debt (if you have any)
- What is good debt vs. bad debt
If you would like more details on how you can build a solid foundation & never have to rely upon payday loans, read the Five Fundamentals of Fiscal Fitness.
The more you know about your personal finances, or the more you research about a purchase, the less likely you are to be taken advantage of. If you don’t know where to go, you should start with your installation. You should be able to find a personal finance office on your installation that can help you with the basics. If you can’t find one near you, go to Military OneSource. Also, learn about your rights under the Military Lending Act and the Servicemembers Civil Relief Act.
Don’t get loans for crap. Crap includes just about anything you put on your credit card or take a personal loan for, such as new clothes, rims, accessories, etc. If you’re going to buy crap, then you should pay in cash, not with payday loans. After a while, you’ll realize that your cash should probably be going to things that matter to you.
Live within your means. This goes hand-in-hand with the previous point. However, this applies for things you would consider ‘necessities.’ Clothes, Christmas presents, groceries—all of those things can fit into your budget. However, you should prioritize which ones you need right now (like groceries), and which ones you need to save money for (like new shoes).
Don’t feel like you need to keep up with your friends. It seems really difficult when you’re making very little money, and all your friends have cool cars, nice digs, and new clothes. However, if you’re the same pay grade, you KNOW that if you can’t afford something, your friends can’t either. It’s only a matter of time before bad habits catch up to people.
Start saving some of your money. Each person should develop the habit of being able to live on 90% of your take home pay. Not only do you benefit from investing the 10%, you are able to build long-term habits that keep you in the black even when times feel tight.
Research your big purchases. There is more information out there than ever. When buying a car, you can ask the seller to pull up their Carfax, which shows you the car history, and helps you avoid buying a lemon. With Angie’s List, you can research multiple vendors, dealerships, or contractors before you ever have to put money down. Take advantage of the available information to vet any big purchase you make.
Understand your loan options before you need them. Before you need a car, you should take some time to learn about how car loans work. Call USAA or Navy Federal Credit Union, and have them walk you through the car loan process, even if you don’t intend to buy a car immediately. Same with a mortgage—get prequalified before you actually start house-hunting. If you need short-term money, really think about it before getting a payday loan.
If you need a short-term loan, go to your service’s emergency financial assistance office. Don’t get payday loans, or go to someone who will give you an advance on your tax refund. First, if you don’t really need the money but are looking to buy something cool, you’re going to pay a LOT of money for it through one of the shady guys. However, if you’re in dire straits (need to go on emergency leave, car broke down, etc.), your emergency financial assistance office can sit down with you and help you through the options. Most importantly, they’ll provide a sanity check—if they turn you down, it’s probably for a good reason.
A person who goes through all of these items in this checklist will probably never have a confrontation with payday loans or predatory lenders. However, it’s just as important to keep an eye out for those folks who might be on the verge of getting mixed up with a predatory lender, so you can pull them aside before it’s too late.
Forrest Baumhover is a Certified Financial Planner™ and owner of Westchase Financial Planning, a fee-only financial planning firm in Tampa, FL. As a retired naval officer, Forrest helps veterans, transitioning servicemembers and their families address the financial challenges of post-military life so they can achieve financial independence and spend more time doing the things they love.