Research Shows 44 Percent of Active-Duty Military Members Used Payday Loans

Inside Subprime: July 20, 2018

By Lindsay Frankel

Short-term, alternative loan products provide access to cash for those underserved by traditional banks, but the high interest rates and fees make these products risky to use. Still, people with bad credit often turn to payday loans and other alternative loans, especially active military members.

According to a recent Javelin Strategy & Research blog post, an astounding 44 percent of active members of the military used a payday loan in the last year. 53 percent used a check-cashing service outside of a bank, and 68 percent took out a tax refund loan. When compared to usage rates among all consumers, these usage rates are extremely high. Less than 10 percent of the population used loan products in each of these alternative categories last year.

One possible factor affecting these usage rates is the age and credit history of active-duty military. Payday loans tend to be more popular among Gen Y consumers because they tend to earn less income and lack an established or positive credit history. But there may also be other conditions at play.

The popularity of payday loans among active military is surprising in part because there are more protections in place for this group under the law. The Military Lending Act was enacted in 2006 to cap interest rates on payday loans. The intent was to prevent military members from becoming trapped in debt while overseas, which could cause stress that would hinder their abilities. The Military Lending Act goes even further to protect borrowers than the Consumer Financial Protection Bureau’s rule on payday lending, which has been delayed from going into effect.

One possibility is that the protections of the Military Lending Act make payday loans a more attractive option to military members. Interest rates are capped at 36 percent on payday loans for active military. This rate is still high when compared to the traditional financial products offered to those with an established credit history, but for active military who have yet to build credit, there may be little to no difference in fees from using a credit card or other bank product.

Payday loans charge predatory interest rates. Payday loans in Ohio cost borrowers an average of 591 percent annual interest, the highest in the nation. But since interest rates for military members are capped at 36 percent, there may be little incentive for active members of the military to avoid these products and turn to traditional sources of credit instead.

Unfortunately, using payday loans does nothing to build positive credit for military members. Instead, these products can trap individuals in debt when their income can’t cover their expenses in addition to interest on a loan.

To learn more about payday loans in the United States, check out these related pages and articles from OppLoans: