A new law prohibits "payday loans" to members of the U.S. military. The law protects service members against a variety of unsavory practices by making it unlawful for a lender to require a check or other access to a service member's account as security for a loan, and caps interest at 36%. Anticipating the machinations of payday lenders who often speak in terms of "fees" rather than "interest", lawmakers also made it clear that any associated fees must be included when calculating the interest rate.
On the surface, this law looks like a positive development, but a closer look raises some serious questions. First, why would Congress want to prevent military service members from taking out payday loans? The answer is simple: payday loans can be one of the fastest available roads to financial ruin.
With annual interests rates often running at several hundred percent, a $500 loan can in many states end up costing the borrower thousands of dollars. Recent studies indicate that a substantial percentage of people taking out payday loans become trapped in a cycle that has them taking out an average of 13 loans a year. Fees mount, loans are extended or consumers forced to "reborrow" again and again, often ending up in collections or even filing bankruptcy. So why are we only protecting military service members from this kind of predatory lending?
The easy answer is that payday loan stores prey on members of the military. Of course, there's disagreement about that statement. Payday loan store advocates and representatives tend to point to statistics indicating that only about 1.3% of payday loans are made to service members, while advocates of the new law focus on a Department of Defense report indicating that members of the military are three times as likely to use payday loans as civilians.
The bottom line, though, is that payday loan stores target those who are in dire financial straits-other people have safer, less expensive options available to them. At the lowest level of military service, a brand new serviceman within four months of joining, earns $1178.10/month. That's not a lot of money, and it's easy to see how a young enlisted person might borrow a couple of hundred dollars to tide her over until payday and then get caught in that downward spiral.
But if that's a risk for military personnel earning $1178.10/month and up, then why is it still legal and acceptable for those same stores to make the same loans at the same interest rates and under the same terms to civilians working full time jobs at minimum wage and grossing an average of $885.80/month?
Payday loans can be dangerous, and may not be beneficial to anyone except the companies making a fortune for recycling the same money to the same people over and over again. But if Congress recognizes that danger and the vulnerability of low-income people to this kind of predatory lending, then our government should take steps to protect everyone from payday loan store practices, not just those it employs.