Military takes aim at payday loans

WASHINGTON — A Pentagon official Thursday urged Congress to limit interest rates on payday loans to military-service members, thousands of whom are paying ruinous rates and falling into a cycle of debt.

The problem is growing, and the financial straits of some military personnel are so severe that they have been removed from their duties and lost their security clearances, an expert told a hearing of the Senate Banking Committee.

They "have fallen into the Venus flytrap of payday lending, and it has literally destroyed their lives," said retired Adm. Charles Abbot, chief executive of the Navy-Marine Corps Relief Society.

A measure imposing a 36 percent cap on the annual interest rate for payday loans to service members passed the Senate earlier this year as part of a defense bill, but the ceiling was not included in a House-passed version.

Prospects for congressional passage of the rate ceiling were unclear, with lawmakers expected to adjourn by the end of the month.

David Chu, the undersecretary of defense for personnel and readiness, testified that Congress should put a ceiling on the cost of credit to military borrowers "to prevent any lenders from imposing usurious rates."

A 36 percent cap is "a high number" but would not cut off useful sources of credit for military personnel, Chu said.

With annual interest rates from 390 percent to over 900 percent, many users of payday loans — military and civilian — get in over their heads when they can't repay them quickly and fees accumulate.

The businesses offer short-term cash advances against borrowers' paychecks and charge fees.

The loans work this way: You need money today, but payday is a week or two away. You write a check dated for your payday and give it to the lender. You get your money, minus the interest fee.

In two weeks, the lender cashes your check or charges you more interest to extend, or "roll over," the loan for another two weeks, possibly at a higher interest rate.

Many of the storefront businesses are clustered around military bases, and many of the military customers are 18 or 19 years old.

Experts say payday lending problems are becoming more prevalent with long troop deployments, as service members and their families face increasing financial hardships.

In a report released last month, the Defense Department estimated 225,000 service members — 17 percent of the military — use the loans.

The Center for Responsible Lending, a group advocating stricter industry controls, says that one in five service members took out such a loan in 2004, and that someone who borrows $325 pays an average $800 in charges.