What We All Can Learn from the Military's Payday Loan Problem

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As a 19-year-old, Robert Knoll made a mistake that many young people do -- he got into debt. Knoll did it by living beyond his meager salary as a U.S. Marine, and using small payday loans to help him get by between paychecks. "The problem, though, is it puts you behind the next payday," Knoll says.

Those $80 to $200 payday loans added up, along with the $50 in interest he'd pay to borrow $200 for five days. With an annual percentage rate on the loan of more than 200 percent, Knoll would post-date a check for $250 for a $200 loan that would be paid off five days later when his paycheck was deposited into his checking account.

"You can spend your entire paycheck before you get it," says Knoll, now an account executive at DRIVEN Public Relations in Temecula, California. He retired as a Marine master sergeant in 2013.

Help From the ARK

Unlike servicemembers today, Knoll didn't have help from the military on payday loans back then. One program that officials are trying to remind military members and their families about is the Asset Recovery Kit.

For a $5 fee, members of 17 credit unions supported by the Pentagon Federal Credit Union Foundation can borrow up to $500 interest-free for 30 days. The program has loaned more than $3.8 million in 8,724 loans since it started in 2004, says Jane Whitfield, president and CEO of the PenFed Foundation. "We want to help in preventing short-term emergencies becoming long-term problems," she says.

Another program meant to help military members avoid getting stung by payday loans is the 2006 Military Lending Act. The law forbids payday lenders from charging more than 36 percent annual interest rates on loans to servicemen, and loans can't be for more than $2,000 or for more than 91 days. Unfortunately for the fiscal health of our servicepeople, those lenders are making good use of loopholes in that law: loopholes that some in Congress are trying to close. In a 2013 study of payday lenders, the Consumer Financial Protection Bureau found that loans cost $10 to $20 per $100 borrowed. A $15 fee on a $100 loan equates to an APR of 391 percent on a 14-day loan.
n a study of payday lenders, the CFPB found that the loans cost $10 to $20 per $100 borrowed. For example, a $15 fee on a $100 loan equates to an APR of 391% on a 14-day loan. - See more at: http://www.thecreditsolutionprogram.com/military-families-get-protection-from-payday-lenders/#sthash.6PGNU2xA.dpuf

Under the ARK program, borrowers must talk to a credit counselor if they return for a loan within two weeks. The counseling lasts 30 minutes to an hour, and covers topics such as how to create a budget, Whitfield says. For many young servicepeople (and civilians), good money management is, unfortunately, a something they were never taught.

Pawn Shops and Credit Cards

Knoll says budgeting was part of his plan when he was young, but it was difficult to do with his low salary and spending choices. After paying $1,000 or so in payday loan interest over a period of two years, he cut his spending and got out of debt. It was as simple as not going anywhere -- even to a bar or restaurant -- when he didn't have any more money until the next payday.

%VIRTUAL-article-sponsoredlinks%Payday loans aren't the only alternative method military members use to get by between paychecks, though 18 percent of them do. Whitfield says 35 percent of military members use pawn shops, auto title loans and other ways (including payday loans) to get short-term cash.

Credit cards are another way to get into debt trouble. About one in three members of the general population carry some credit card debt from month to month, compared to 58 percent of servicemembers, according to an April 2014 survey by the National Foundation for Credit Counseling. They're also twice as likely as the general population to use cash advances from credit cards, the foundation found.

They use such alternative, non-traditional loans because they think they lack other options, according to 60 percent of servicemembers in the survey who took a loan in the last year. And as anyone who has ever had a low income knows, when the landlord is knocking on your door asking for the rent check, you use the options you have.

That's why the military is now making a more intensive effort to remind servicepeople about options like the Asset Recovery Kit and the PenFed Foundation. No matter who you work for, the easiest way out of high-interest debt troubles is to avoid falling into them in the first place.

A former newspaper journalist, Aaron Crowe is a freelance writer who specializes in personal finance, real estate and insurance for various websites, including Wisebread, insurance websites, MortgageLoan.com and AOL.
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