Caught In A Debt Trap!
Young military families make perfect targets for predatory payday lenders.By Charles Lowery
Winter 2005-06
Imagine you are a payday lender. You have one of those strip-mall shops with the neon signs that say "cash advance" or "easy money," and a little scheme that is amazingly lucrative. All you have to do is loan 300 bucks to the same guy every two weeks, passing it back and forth over the counter of your little shop.
Only every time that $300 comes back your way, it has an extra $50 in the stack.
You say your fees are just $15-$20 per $100 borrowed, not bad when you consider that many credit cards charge 24 percent interest or more. (You don't say that the 24 percent figure is an annual rate. Payday loans are two-week loans that turn into long-term debt, and their annual interest rates easily can surpass 400 percent.)
The longer you can get the customer coming back every payday, the better. You're making about $100 a month - $1,300 a year - from each customer, for one little cash outlay of $300.
Quite a scheme, isn't it? And it works. Studies show that the average borrower pays $800 for a $325 payday loan.
Now imagine that you're the potential payday loan customer. You think you know better than to fall into this trap. Well, that's what we all say. Everyone plans to pay back his or her first loan on payday, but hardly anyone does.
After all, this is no ordinary loan. Payday cash advances are carefully designed so that what seems like a short-term boost turns into long-term high-cost debt, without you even knowing what hit you.
Most people who live paycheck to paycheck simply can't make up a cash shortage in two weeks. But payday lenders don't offer installment loans, they don't give you time to re-pay, and they hold your signed personal check to make sure you come back on the due date. If your bank account won't cover the check, you risk bounced check fees and maybe even a civil lawsuit.
Or you fall into the trap the payday lender has set for you: You pay another $50 and refinance the loan.
Most borrowers pay the $50. And while paying the fees each payday rolls around, it gets harder and harder to pay off the loan and walk away. Before fully understanding the danger, the borrower often obtains a second payday loan to try to pay off the first. Many are caught for weeks, months, even years, paying interest of 400 percent or higher on the same repeatedly refinanced loan.
This repeat use is not the exception - it is the general rule. The Center for Responsible Lending and other groups concerned about the impact of predatory lending have documented that the industry depends upon repeat-use accounts for most of its profits.
Looking For Young Families: The Less Financial Experience, The Better
Now think about this: If you were a payday lender, where would you locate your business? You'd look for a concentration of working people bringing home a steady but modest income to keep you raking in the cash and maintaining a bank account to ensure that a personal check is an effective means of collection. Young families would be ideal - the less experience with finances, the better.
And what if you could find a population that faces extra consequences for not paying debts on time as well as a social expectation for responsibility and self-sufficiency? Would such people seek help if they got into trouble?
If you are a payday lender, then it makes perfect sense to locate your stores around military bases, right in the path of these young, hard-working families. And that's exactly what they do.
Two university researchers released a report last spring that documented this fact: Where military bases are located in America, payday lenders are poised to strip servicemembers and their families of their hard-earned cash.
Christopher Peterson of the University of Florida and Steven Graves of California State-Northridge University mapped payday loan locations in 20 states serving as home to 109 military bases. The study found that, in almost every instance, military towns ranked among the highest in the number of payday lenders per capita. At Camp Pendleton, for example, 24 payday loan stores operate within three miles of the base, far more than the five stores the researchers would expect to find in a community with similar demographics.
The Center for Responsible Lending recently published a report that documents the level of payday lender penetration into military communities. Based on industry statements describing the percentage of payday borrowers who are active-duty military, the Center made these estimates:
- Active-duty military personnel are three times more likely than civilians to have taken out a payday loan.
- One in five active-duty military personnel were payday borrowers last year.
- Predatory payday lending costs military families more than $80 million in abusive fees every year.
The New York Times has reported that more than one fourth of all military households have been caught up in payday lending. Officials at the Army Emergency Relief office in Fort Bliss, Tex., have estimated that at least 10 percent of its active-duty personnel have sought counseling for payday lending and other debt problems.
Those are just the servicemembers who have been willing to come forward and seek help. It's not easy to do - they are worried about their reputations and the impact on their careers. Failure to repay a loan is a violation of the Uniform Code of Military Justice, punishable by confinement, court martial, loss of security clearance, transfer to a different unit or discharge. Payday lenders count on this intimidation to keep cash-strapped families coming back again and again.
Escaping The Trap
So what's the answer to this huge problem for military families?
1. Just don't go there. Stay out of payday loan stores in the first place. Payday loans may provide quick and easy cash, but they're not worth the risk. Local credit unions and financial institutions provide quick cash advances and small signature loans at a fraction of the cost of a payday loan. For people drowning in debt, credit counseling and emergency relief programs are the best alternatives. A payday loan is never the only alternative and never the best alternative.
2. Plan an exit strategy. If you're already in, seek help getting out. Higher-ups in the military are well aware of the payday lending problem. Don't be afraid to ask for support. If you're trapped in a payday loan, seek help from the military financial counselor at your installation.
3. Fight back. Help stamp out predatory lending. Several initiatives designed to protect borrowers from abusive lending practices are pending in Congress and individual states. Some of this legislation specifically addresses payday lending and military personnel.
As you work your way out of trouble - and it will take work - speak out and join those who have been burned by payday loans. Don't let these scam artists continue to get away with stripping the hard-earned income of military families.
# # #
Charles Lowery is policy counsel for the Center for Responsible Lending (www.responsiblelending.org; 1-800-747-3207), a non-profit, non-partisan research organization dedicated to fighting predatory lending practices.
# # #
Other Abusive Lending Practices
Predatory lending strips billions in wealth from consumers and communities in the U.S. each year. Borrowers lose more than $25 billion annually due to payday loans and other lending abuses:
Rent-to-own companies charge a weekly or monthly rent for a stated period until the property is owned by the consumer. A late payment can trigger very high interest, although the company usually repossesses the item. Under a typical rent-to-own contract, a consumer may pay as much as $2,200 over two years to purchase a $500 TV.
Predatory mortgage lending typically involves a refinance of an existing loan that is packed with excessive or unnecessary fees and provides no tangible benefit to the borrower. Most abusive lending takes place in the sub-prime market, targeting people with weak or blemished credit records.
Tax-refund anticipation loans are short-term cash advances against a customer's anticipated income tax refund, offered at annual interest rates as high as 700 percent. These loans speed up the refund process by as little as one week. More than 12 million people take out tax-refund loans each year.
Overdraft loans, or "bounce protection" plans, are offered by banks to cover account overdrafts up to a set dollar limit. In exchange, bounced check fees range from about $20-$35 for each transaction. Some banks also charge $2-$5 per day until the account shows a positive balance.
Credit card abuses: Many families of limited means have come to rely on credit cards to weather economic downturns or simply to make ends meet. They have become attractive targets for the marketing of cards that contain hidden transfer charges, exorbitant late fees and exploding interest rates.
# # #
Alternatives To Payday Loans
- Military credit union loans: small loans at a fraction of the cost of payday loans
- State and local credit union loans: cash advances as low as 12 percent APR
- Other credit unions: from prime to 18 percent APR
- Military relief societies: low interest rate loans and grants in cases of urgent financial need
- Credit card advances: one-tenth the cost of payday or less
- Small consumer loans: some states limit interest rates to 36 percent on these loans
- "Good" overdraft protection: this protection, tied to a savings or line of credit, may work for you but avoid new overdraft loan programs that end up costing huge fees
- Late fees: usually cheaper than one payday loan fee, always cheaper than a repeat payday loan
- Work out a plan with creditors: utility companies, credit card companies and landlords often allow extra time to pay
Source: Center for Responsible Lending