PaydayAct

If someone walked up to you and offered you a loan with a 36% interest rate, you’d know to walk away and look for a better deal somewhere else. Even credit cards usually offer better rates than that.

But thanks to payday lenders’ hard-to-resist sales tactics, many people fall into the trap of payday loans that come saddled with steep fees that over time can result in triple-digit interest rates.

And payday lenders make a point of targeting people in the military. Why? Because they know military personnel have steady paychecks, are unlikely to get laid off or quit their jobs and — given that many personnel are young and away from home for the first time — often have little in savings and not much experience in managing personal finances.

Plus, military personnel tend not to be highly paid. That makes it likelier they’ll need to get their hands on cash in a hurry.

Payday loan and check-cashing shops are concentrated around military bases, and online lenders aim their products at military personnel, using ads that trumpet “military loans” and “exclusively serving the military.” The Department of Defense estimates that one in every four military service members has taken out a payday loan.
Not only is this a problem for the people who find themselves entering a debt spiral, but service members with low credit scores or too-high debt loads may find their financial problems affect their security clearances. Ultimately, that can mean service members are unable to deploy when needed.

It’s easy to see the appeal of payday loans: Lenders promise same-day cash and an easy repayment plan, and they often don’t make clear how much borrowers will end up paying in interest. For someone who needs cash fast, especially in these tough economic times, the offer may be hard to resist.

Nuts and bolts

Here’s how these loans work: A lender offers short-term cash based on a borrower’s expected paycheck. The borrower agrees to use his or her next paycheck to pay off the loan. He or she can walk into a payday loan office, write a postdated check for the amount borrowed and walk out with a few hundred dollars. The idea is that the lender will cash the check on the borrower’s next payday or withdraw a similar amount from the borrower’s bank account.

The good news: Congress recently passed a law limiting the interest rate on these loans to service members to 36%. The bad news: That’s still a steep rate. Over the course of a year, that’s $180 in interest on a $500 loan.

But the real problem is that borrowers can fall into a cycle of debt: If their paychecks don’t cover their first loans, they may take out new loans to pay off the initial ones. Nine out of 10 service members who take out a payday loan wind up taking at least five loans a year. By the time you’ve rolled over your debt several times, the interest rate on that original loan has ballooned out of control. The average borrower pays $834 for a $339 loan, according to a 2006 U.S. Department of Defense report (.pdf file) on payday lenders.

The mission for military personnel

Just about everyone faces a tough financial situation at some point in his or her life. Often it seems easier to keep money issues private rather than tell anyone you’re short of cash or struggling to pay bills. None of us wants to appear unable to handle our finances. But turning to a payday lender can make matters worse.

Consider these options before you go to a payday lender:

• If you are in the military, there are resources. Personal-finance counselors are available to work with service members. Also, military aid societies, as well as banks and credit unions on or near bases, can be good alternative sources of funds. In 2005, military aid societies provided more than $87 million in assistance, according to the Department of Defense study, and they even offer some loans interest-free. Plus, military aid societies have special programs to help service members trapped in high-cost loans. Meanwhile, banks and credit unions often provide lower-cost short-term loans as alternatives to payday loans. Be sure to research all of your options.

• If you find yourself in a financial bind, consider going to a consumer credit counseling agency for help. According to the Defense Department report, military bases offer credit counseling. If you decide to go to an off-base counseling agency, make sure you find one that is ready to work with your specific situation and is focused on providing educational services. The National Foundation for Credit Counseling Web site is a good place to search for a local counselor.

• Though it’s best to avoid using credit cards when possible, it’s also true that a credit card makes better financial sense than a payday loan. You’ll pay for cash advances, and, of course, credit cards charge interest. Still, those fees will be lower than those on a payday loan. Plus, you’re less likely to fall into the trap of taking out one loan to pay another. If you do need to borrow money, assess your family spending plan and set aside some money every month to pay down your loan. You need to plan to pay substantially more than the minimum payment every month to get your balance paid off.

• As noted, military members are often targets of financial scams. In some cases, former service members encourage military personnel to buy financial products that aren’t suited to them

http://articles.moneycentral.msn.com