Mission readiness through financial readiness

  • Published
  • By Staff Sgt. Justin Dennison
  • 341st Space Wing Judge Advocates Office
MALMSTROM AIR FORCE BASE, Mont. --  The rules have changed for "payday" loans and vehicle title loans for military members and their families. Last year, Congress set a 36 percent interest rate cap on certain consumer credit transactions to active-duty military and their family members. Congress also directed the DoD to create rules to reduce the effects of predatory lending on military readiness. The finalized rules took effect nationwide Oct. 1, 2007. 

In adopting the new rules, DoD linked "financial readiness with mission readiness." Many studies put financial troubles in the top three sources of stress -- even ahead of deployments, health and personal relationships. 

DoD found certain predatory lending practices continue the cycle of debt. The cycle of debt can make a service member's financial troubles worse over time. Predatory practices include charging excessive fees or interest, lending without concern about the borrower's ability to repay and enticing the borrower to repeatedly refinance. 

Two common predatory practices are payday loans and vehicle title loans. Both require a borrower to pay the original amount borrowed, or principal, plus hefty interest charges and fees at the end of a short period of time. The charges and fees often exceed a 300 percent annual interest rate, compared with 20 percent on most high-rate credit cards. 

The creditor also requires collateral, such as a vehicle, that will be forfeited when the loan is not repaid. Other collateral may be a check post-dated on the next scheduled pay day, with insufficient funds fees and even criminal charges if the check is not honored. 

Creditors are no longer allowed to charge a Military Annual Percentage Rate higher than 36 percent to active-duty military or their family members on payday and vehicle title loans. The MAPR is similar to the widely quoted Annual Percentage Rate but includes fees and charges sometimes omitted from the APR calculation. It is expected that many businesses will simply stop offering these short-term loan products to military members. In addition, many Airman may find their previous loans "accelerated" or due before Oct. 1 despite agreeing to a later date. Most predatory loan contracts allow the lender to change the due date. 

In order to break the cycle of debt, DoD recommends service members contact other sources of short-term credit, including the Air Force Aid Society, and banks and credit unions. These lenders can often provide the same service, but almost always at a lower cost to the service member. Military members can also turn to other base resources, such as personal financial advisors or having loan contracts reviewed by judge advocates.