Young, financially inexperienced members of the military can find themselves paying high fees and triple-digit interest rates. New government rules could help.
After volunteering to protect their country overseas, service members are often targeted by nefarious forces at home: predatory lenders.
These types of lenders tend to pop up around military installations, offering credit that appears to be straightforward but is often riddled with hidden fees and clauses that can trigger triple-digit interest rates.
The loans, which tend to be short-term and for small sums, are marketed to young, often financially inexperienced soldiers without credit histories.
A lot of service members don’t have good credit when they join the military and are often lured by the promise of low interest rates or low payments, says Cheri Nylen, director of casework for the Navy-Marine Corp Relief Society. “They haven’t been taught to be savvy consumers.”
In an effort to curtail predatory lending, Congress passed the Military Lending Act in 2006, a regulation that placed a 36% interest rate cap (known as Military APR) on payday, car title, and refund anticipation loans to active duty, reserve duty, or active guard service members.
Creditors, however, circumvented the narrow scope of the law by extending the terms of the loans or raising loan amounts, prompting the Defense Department to propose an expansion of the regulations in September. The proposed rules are much sounder because they cover the whole gamut of financial products, says Nylen. That includes credit cards and installment loans.
Though 36% is still high, Nylen feels it protects service members with little to no credit histories and those who may have grown up in communities plagued with similar lending schemes. “Many of them are not aware that there are very reasonable alternatives,” says Nylen. “Some come from communities where watching a car being repossessed is not uncommon.”
According to a 2012 study on financial capability in the military, 35% of service members have resorted to non-bank loans; nearly half of those borrowers are entry-level enlisted personnel.
Military life comes with a regular, on-time paycheck, notes JJ Montanaro, a financial planner with USAA. “Often times, someone fairly young is getting that paycheck for the first time, and I think that makes them a pretty ripe target for folks looking to take advantage of them.”
Debt in the military is a big deal. Service members with too much debt are at risk of having their security clearances revoked, which can result in reclassification, being overlooked for promotions, and even involuntary separation of services. From 2010 to 2012, 12% of active duty and activated reserve and guard personnel declared bankruptcy.
Fortunately, there are resources available to help service members find better options.
Asking for help can be hard, especially when you’re in an environment that encourages individual responsibility.
“For military folks, making independent decisions and being self-sufficient are valued traits,” says Montanaro. “The idea of asking for help doesn’t come naturally.”
There are free resources available to service members, including financial management assistance programs at family and community centers on bases. Additionally, each branch of the armed services has a relief society, a nonprofit that provides financial assistance and education to military personnel.
Learn to Spot Trouble
Many predatory lenders altered their strategies to get around the MLA in 2007, and though the proposed regulations will be more inclusive, be weary of shifting strategies.
“If something makes money, and then the rules change, people who prey on the less aware will continue to find ways to make money,” says Nylen.
Some lenders have shifted their services to the web, creating landing pages using colors and logos similar to more reputable organizations. Also, since relief societies are non-profits with limited resources, they don’t pay to be at the top of an online search, leaving the prime spot open to predatory lenders.
“You cannot trust that everything online is truthful,” says Nylen. “If it’s too good to be true, it probably is.”
According to Nylen, a new arena for predatory lenders involves preying on emotionally vulnerable service members who need travel funds for a family emergency. Service members can avoid these types of ploys by understanding what resources are available to them. Military personnel have 24/7 access to emergency services, Nylen says, and people in leadership roles can help connect you.
Develop a Strategy
Often, big-ticket purchases are connected to the very understandable desire to celebrate a homecoming after deployment. However, taking the time to think about the impact on your future finances is still important.
“During that cooling off period, you should ask yourself the question, ‘Where will this purchase put me in 6 months?’” says Montanaro. “In all likelihood, a new video console or weekend getaway with friends will pass the test. On the other hand, a $50,000 truck probably won’t.”
And sometimes, the most gratifying reward is time with family. When Montanaro, an Army veteran, returned from a deployment in Afghanistan, he realized that his family craved time with him, not presents.
“The beautiful thing about that from a financial standpoint is that you can give them what they want without a huge cash outlay,” he says. “A few days of ‘lock-down’ at home or even a nearby getaway can be had for a lot less than a big trip to Disney World.”