I have seen firsthand the devastation that payday lending can wreak on responsible soldiers who are doing everything they can to fulfill their duties, take care of their families and get out of debt. One soldier told me it was like being in a black hole. She felt sick to her stomach every time she thought about it.
I can only imagine how that pain is magnified for combat veterans, who upon returning home have experienced higher rates of post-traumatic stress disorder, long-term unemployment and in many cases homelessness. These are complex problems that require in-depth and individualized solutions. But putting an end to abusive high-cost, payday, car title and installment lending is one simple step we can take right now.
Such loans, usually for about $300, carry on average a whopping 391% interest rate. Repayment is due in full, with interest, in about two weeks. Not surprisingly, unless they win the lottery many borrowers will then have to take out another loan in order to pay off the previous loan or to meet other expenses. These stack up. The average borrower of these types of credit products takes out nine loans a year.
Repeat borrowing is not a side effect of payday and car title lending. It is the business model. Payday lenders do not check whether the loan is affordable. They do not look into whether a borrower will be able to repay the loan while meeting other expenses because they simply do not care. Their profit is made in fees and interest. Consider the math: If a typical payday loan of $300 with a $45 fee is rolled over eight times, the borrower will owe $405 in fees alone.
High-cost lenders also make longer-term loans that are duplicitously designed to generate a profit as a result of the high rates of late payments and default. They structure loans to reap refinancing fees, or so that the interest gets repaid without the principal ever really being reduced.
There are no official statistics on how many veterans get caught in these debt traps, but study after study show that these lenders prey on the most vulnerable members of our society – a demographic that includes far too many veterans.
We also know that as long as they continue to profit payday lenders have no compunction about the damage their high-cost loans inflict on our armed forces, their families and others who fall into the trap. For years, they have swarmed military bases, preying on young, often financially unsophisticated service men and women who, with their steady paychecks, are perfect catches.
The problem got so bad that the Defense Department called payday lending a threat to military readiness and tried to stop it. Payday lenders fought back, exploiting loopholes until the Defense Department had to rewrite the rules to make them tougher. This is an important and sorely welcome relief. Today, 10% of veterans leave the service with more than $40,000 in consumer debt.
A crushing debt burden can destroy anyone's peace of mind and financial future. People who take out payday loans are far more likely to end up in bankruptcy than are people who get rejected for a payday loan. Payday loans cause people to be late on other bills, such as rent or medical expenses. Many people lose their bank accounts. The downward spiral may never end.
Our nation has a long way to go to make sure those who protect and defend our homeland are themselves protected and defended when they return home to rebuild their lives. Stopping the debt trap is an important first step.
Let's fight to cap all loans at an annual rate of 36% for veterans and everyone else, just as the Defense Department does for loans to active duty military members.
Meanwhile, let's support the Consumer Financial Protection Bureau, which is in the process of writing new rules that, if done well, will rein in the worst abuses of payday lending.
We owe it to our veterans to do everything in our power to ensure those rules are strong, fair and honor those who served.
Richard Kitterman is a retired master sergeant in the U.S. Army and the former chief of the consumer affairs office at Fort Hood.