A payday loan is a small loan made to an individual against their next paycheck. Fundamentally, the person’s paycheck is used as a type of collateral for the loan. For some people, especially those dealing with a genuine emergency situation and need money fast, a payday loan can be helpful. However, the interest rates on payday loans are usually extremely high, sometimes way above thirty-six percent of the total loan amount. For a loan of $100 it could cost the borrower more than $136 to pay the loan back, depending on the lender’s loan policies. Also, some lenders will request bank access information, and/or a car title as a security for the loan. As you might imagine military payday loans can easily become a financial nightmare.

Military Payday Loans

Prior to October 1, 2007 payday loans for military personnel was an accepted

practice. Soldiers who needed money immediately could go to a lender and get a US military loan against their next paycheck. This practice was particularly helpful to active duty soldiers who were being deployed overseas without much warning or reservists who were being called to active duty. For many of these individuals the military payday loan was a helpful tool to meet family needs with. However, the Department of Defense began to see some significant problems with payday loans for military personnel, particularly with the lenders.

Lender Abuses

Military personnel are perhaps one of the most secure populations to lend money to, specifically because their pay is, for the most part, a guarantee, so long as they remain in the armed forces. Secondly, the military pay check is a United States government check, which in and of itself is a guarantee of payment. These two facts alone make this group of people ideal for lenders to take advantage of.

One way payday lenders, and other types of lenders, were taking advantage of military personnel was charging this population outrageously high interest rates on the money lent. Some of those rates exceeded thirty six percent of the original loan value. Considering that the base pay for a new recruit is approximately $1200 per month, if a new recruit was to borrow against their whole pay check, they would have to pay back $1632, which means it would take over one and half paychecks for that soldier to pay the money back.

Furthermore, some unscrupulous lenders were requiring that the borrower sign over a vehicle title, give bank account accessing information, and/or waive their protection under the Servicemembers’ Civil Relief Act, as loan security. These payday loan military strategies and others placed many soldiers in unfavorable financial situations.

The 2007 Military Authorization Act

The 2007 Military Authorization Act was passed and established by the United States congress as a result of recommendations from the Department of Defense and as a means to protect military personnel from any lenders or lending companies that were taking advantage of them. This act establishes laws and guidelines that all lenders must follow. Any military personnel seeking any type of loan should familiarize themselves with these laws before consulting with lenders. Here are a few things the law prohibits:

Alloments – Military personnel are not required to establish an allotment as part of a condition to receive a loan.
Vehicle Title – Service members or their families are not required to surrender their vehicle titles as collateral for a loan.
Checks or Other Account Information – Cannot be used as a security to receive a loan.
Thirty-six Percent Interest Cap – Lenders are prohibited from charging over thirty-six percent interest rate on any loan made to military personnel.
Waiving SCRA or other federal rights.