The dangers of the payday loan trap

  • Published
  • By Capt. Raj Mathew
  • Chief of general law, 42nd Air Base Wing
Need quick cash? Don't use payday loans! Payday loans offer a quick path to debt. A cash advance on a future paycheck may seem like a solution to a short-term financial crisis, but odds are that cash advances or payday loans will come at an extremely high price and trap you in a cycle of long-term debt.

During these turbulent economic times a lot of our Airmen are facing, they might be tempted by payday loans as a source of short-term financing. Payday loans are easy to get, but they are definitely not a good idea. Payday loans won't help solve your underlying financial problem, and they often can make your situation much worse.

A payday loan is a cash loan given to you based on the fact that the loan is expected to be repaid with their next paycheck. It's basically like getting part of your next paycheck early. The borrower is expected to show proof of employment and a bank statement. The loan applicant then writes a post-dated check for the amount of the loan, plus fees. If you aren't able to repay the loan at that time, you can roll over the loan to repay it on the following payday. This is where so many people get into trouble. The borrower is forced to roll over the loan because they are unable to get by on what is left over from their depleted paycheck, so the loan amount continues to grow at a very high rate of interest. This vicious cycle continues until the person is forced to take out another payday loan to pay off the first payday loan. This process leads to more debt than the person can handle, and some are forced to go bankrupt because of their decision to take out a payday loan.

Some states have limits on how high the annual percentage rate for these loans can get, and some states don't allow these types of loans at all. However, some states, such as Alabama, barely restrict payday lenders, and the APR could be anywhere from 300-600 percent. As a result, you could end up paying more in interest than you originally borrowed in the first place.

Recognizing the harm that can result from a service member getting a high-cost, short-term loan, Congress passed the Military Lending Act. The act limits the fees and interest rates lenders can charge military members and their families for payday loans, vehicle title loans and tax refund anticipation loans. The Military Lending Act caps interest and fees on these loans to an annual percentage rate of 36 percent and prohibits the lender from securing the loan by holding a check, car title or obtaining access to a bank account. Lenders who violate the law face criminal penalties and must return the interest that you paid on a loan. Even though interest rates are capped for active-duty service members and their families, the costs of these loans are still high and can quickly land a borrower in serious debt.

Unfortunately, many lenders have figured out ways to work around the very specific limits of the Military Lending Act, targeting active-duty service members with loans that are just as harmful as the ones forbidden by the act. Short-term loans not covered under the 36-percent rate cap include loans for more than $2,000, loans that last for more than 91 days, open-end credit, and auto-title loans with terms longer than 181 days.

If you find yourself in a difficult financial situation, there are alternatives to getting a payday loan. For example, the Air Force Aid Society can provide financial assistance to Airmen and their eligible family members to meet urgent needs. The society provides interest-free loans (Falcon Loans) and grants based on the individual's situation. All active duty Air Force personnel and Air Force Reserve/Air National Guard personnel activated for 15 days or longer under Title 10 U.S.C. orders and their spouses (with power of attorney when the service member is away from his/her duty station) are eligible for these loans. The service member must not have an outstanding loan balance with Air Force Aid Society to remain eligible for a Falcon Loan. Airmen or eligible family members who have an emergency need and are at an Air Force base may apply online or in person at the Air Force Aid office in the Airman and Family Readiness Center.

If you have questions, need clarification, or find yourself in a situation where a payday loan company has potentially violated the law, please contact the legal office at 953-2786 and set up a legal assistance consultation with one of our attorneys. Also, the Airman and Family Readiness Center offers great advice on personal financial matters, and you can meet with Fran Jackson (personal financial readiness consultant - 953-2353) to discuss any issues you may have.