When cash is tight, payday loans, car title loans or tax refund anticipation loans may seem like a good idea. But these loans can sabotage your finances and land you on debt row. Before you sign on the dotted line, review your loan terms carefully and know the law. When it comes to loans, the military has great information about special protections just for you.
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Short-term loans can have high costs
People short of cash are often tempted by the easy terms of payday loans, car title loans or tax refund anticipation loans without realizing how expensive they really are. The Military Lending Act defends you and your family from predatory lending that targets members of the military. The act limits how much lenders can charge for these loans and prohibits a lender from securing the loan by holding a check, car title or obtaining access to a bank account. But you can't protect yourself against these money traps unless you know what they are.
- Payday loans: Payday loans may look like a good way to get quick cash between paychecks, but they carry sky-high interest rates. For a two-week loan of $100, it's not unusual for a lender to charge $15, which comes to about $400 per year. What might seem an easy way to tide you over financially can get you in the hole faster than almost any other type of debt. Too often, the borrower takes out another payday loan to pay for the previous one, creating a cycle of debt.
- Vehicle title loans: Vehicle title loans are short-term loans that can carry high interest rates. Like some payday loans, they can trap people who don't have much money. Under a vehicle title loan, the borrower gives the title of his or her car and a copy of the keys to a lender as security for the advance. If the borrower doesn't repay the loan or falls behind in payments, the lender takes the car, sells it and keeps the money.
- Refund anticipation loans: Ads often appear during tax-filing season touting these loans as a way to get your income tax refund without having to wait for the Internal Revenue Service to issue it directly. A tax preparer will file your tax return and loan you the amount of your anticipated refund. Fees and handling charges make it very costly. An $89 processing fee for a $1,000 tax refund is like paying an annual rate of 250 percent on your loan. These loans are worse than a last resort. They're never a smart option. If you have one of these loans, cut expenses or raise money some other way to pay back the loan as quickly as possible.
Targeted programs can help military members
As a member of the military, you can access a number of services to help you get rid of these loans and avoid them in the future.
- Service branch relief societies: These organizations can provide loans or grants to cover emergency financial needs. Each branch of service has its own relief society, including the Army Emergency Relief Society, Navy-Marine Corps Relief Society, Air Force Aid Society and Coast Guard Mutual Assistance.
- Banks and credit unions: Banks and credit unions on your military installation offer low-cost, short-term loans to help you.
- No-cost tax e-filing services: Through Military OneSource, you may be eligible to file your federal and up to three state tax returns at no cost. If you prepare your own return, you can electronically file your federal return at no cost through the Internal Revenue Service Free File. Additionally, the IRS partners with the military through the Volunteer Income Tax Assistance program to provide no-cost tax preparation to service members and their families at installations in the United States and around the world.
In addition, the Department of Defense regulation that implements the Military Lending Act limits the amount a lender can charge for interest, fees, credit insurance and other credit-related ancillary products sold with a loan. Lenders that knowingly violate this rule may be face civil and criminal penalties. Any loan made that violates the law is void from the start.
To help prevent unfair lending practices to service member and enforce the consumer protections in the act, the Department of Defense collaborates with the states through the USA4 Military Families initiative. Under this program, the department encourages states to modify their laws to include provisions of the act, allow state agencies to enforce the regulation and partner with the Federal Trade Commission to give the state agencies access to Consumer Sentinel. The information in Consumer Sentinel can support potential investigations into companies suspected of abusive practices or fraud, and help discover trends that may need new laws to stop.
Avoid the debt trap: Take control of your finances
While these services and protections help, you have a role to play as well. By educating yourself, protecting your finances and planning for your future, you can get on the right path.
- Educate yourself: If you're wary of a company's financial product or service, become a smart consumer by searching the Consumer Complaint Database at the Consumer Financial Protection Bureau. You can also submit a complaint to help educate others. The Consumer Financial Protection Bureau's Office of Servicemembers Affairs blog contains additional relevant information.
- Protect your finances: The Consumer Financial Protection Bureau's Protecting your finances Web page provides details on accessing your benefits, tips against unknown solicitations and scams, and information on your rights under the Servicemembers Civil Relief Act.
- Plan for your future: The Consumer Financial Protection Bureau's Planning for your future Web page provides information and resources to help you save and fund your education.
Whether youre trying to pay off one of these loans or trying to get started on your financial future, the installation personal financial management specialists can help. Located in the Military and Family Support Centers, these trained professionals can assist you with everything from money-management skills, financial planning and budgeting to one-on-one financial counseling. To find a personal financial management counselor, visit MilitaryINSTALLATIONS and select "Personal Financial Management Services." If you don't live near a military installation, financial counseling is also available through Military OneSource and the Military and Family Life Counselor Program. Military OneSource also offers specialty financial counseling consultations via video chat.
Making sound financial decisions is good for your security clearance, your career and your future. With so many resources available, there's no reason to use payday, vehicle title or refund anticipation loans. Take advantage of all the support at hand and start building a strong financial future.