Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: May 7, 2012

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The United States possesses the most powerful military the world has ever seen. Stationed in nearly every country on Earth, the U.S. armed forces use their might, technology and prowess to protect, serve, and assist not only our own nation, but others as well. When they return home, however, our service members don’t always receive the treatment they deserve. The Vietnam War is perhaps the most blazing example, but there’s also a lesser-known facet in which our troops have been victimized, preyed upon, and taken advantage of. That area is in the world of financing, particularly by payday loan lenders. In fact, our current and former soldiers have been targeted by unscrupulous lenders to such an extent that those lenders have drawn the ire of Congress, and now must operate within the confines of protective law that shields our military from bad lending practices.

But payday loans haven’t only hurt our military, so why is it that our military is the only group of people that have received blanket protections from these short-term lenders? That’s not to say our soldiers shouldn’t be protected—they dedicated years of their lives to protecting us and our country, and the least we can do is protect them from financial enemies here on the mainland. However, it’s interesting that our lawmakers feel payday loans present dangers to our military, but that they don’t seem to feel our general public is vulnerable to those same dangers.

Payday Loans and the Dangers They Hold

Borrowers looking for payday loans are essentially in the market for cash advances, or the acquisition of money before their next paycheck. They’re backed by a postdated check that’s written for the amount of the principal plus any interest or fees that a lender charges. This type of financing usually has no credit limitations, which prompts lenders to charge high—often deemed excessive and usurious—fees.

Additionally, because payday loans lack credit checks, prompting those with bad credit to turn to them, consumer advocates say they prey on the poor, the underprivileged, and the financially naïve.

Our service members are often generalized to belong to the latter category, with consumer advocates proclaiming that soldiers’ time away from the mainland and everyday life prevents them from learning not only the intricacies of the financing world, but even the basic concepts.

A media release from the office of Bill Nelson, a U.S. Senator from Florida, said that the “financial naïveté and regular paychecks made young enlisted troops perfect targets for a growing industry of lenders who bet that high-interest, short-term loans cannot easily be repaid.”

Siding with such sentiments, the Department of Defense submitted a report on predatory lending practices directed at members of the armed forces, which outlined in detail the problems with payday loans and the methods in which lenders preyed upon our service members.

Naturally, payday lobbyists mounted a full-fledged attack, trying to sway Congress to their side. But then the Military Officers Association of America counterattacked with a powerful remark: “There’s a clear-cut line here: Congress must decide between supporting the troops or supporting the payday lenders who are leeching off them and hurting military families and military readiness. There’s no halfway as far as we’re concerned.”

And Congress did decide: beginning on October 1, 2007, the John Warner National Defense Authorization Act for the Fiscal Year 2007 became active, prohibiting payday lenders from charging more than 36 percent interest to military borrowers.

A Step in the Right Direction

While 36 percent interest sounds incredibly high when compared to other types of financing, such as mortgages, which are now averaging between the high 3 and low 4 percents, it’s a massive limitation on the short-term industry’s usual practices.

Most payday loans come with fees around $15 per $100 borrowed. If that’s converted to an annual percentage rate (APR), we’re looking at 390 percent.

Comparatively, 36 percent is more than welcome.

But while this is a step in the right direction there’s an obvious problem still looming over this topic: the general public is still subjected to 390 percent (or higher) interest rates.

There are plenty of people in the military who are fiscally responsible and economically savvy. Conversely, there are plenty of soldiers who are not. That exact same dichotomy exists in the general public.

We have plenty of people from all walks of life who know how volatile that payday loans can be if rolled over multiple times. But on the other hand, there are those who can’t even grasp that payday loans can be dangerous to their financial health. And that begs the question: if we have laws in place to protect one group of citizens, why doesn’t Congress protect another group subject to the same predatory practices too?

While, thankfully, our military protected from predatory practices, it’s not very clear why the general public is seen as “less naïve” if we’re going to consider Congress’s above-mentioned reasoning behind enacting the military-protection law.