Levin College of Law

Military Families Targeted For High-Interest Loans, UF Law Professor Says

GAINESVILLE, Fla. Payday loan companies – which make high-cost loans to cash-strapped people – target military members and their families, according to a study co-authored by a University of Florida law professor.

After collecting data from more than 13,000 ZIP codes across the country, the study’s authors found payday loan operations clustered in areas near military bases.

“Payday loan companies vociferously deny that they are targeting military personnel, but the numbers show that they do,” said Christopher L. Peterson, an assistant professor at UF’s Levin College of Law. “It’s sad enough to see someone get into financial trouble because someone lent him money at more than 400 percent interest. It’s even worse when that borrower is a person who is fighting to protect our freedom — someone whose career can be ruined by a loan of this sort.”

Payday loans are high-interest loans intended to tide the borrower over to his next paycheck. In a typical payday loan, a lender might give a borrower $100 cash in exchange for a post-dated check for $115. When the loan comes due, typically two weeks later, the lender cashes the check, recouping his $100 plus a $15 “lender’s fee.”

If the borrower doesn’t have enough money in the bank when the loan is due, he can always refinance — by borrowing more money on the same terms. Known as a “rollover,” this practice can quickly turn a small loan into a sizable financial obligation. Charges for payday loans vary, but a typical lender will charge around $17 or $18 for a two-week loan of $100. That’s roughly equivalent to an annual interest rate of 450 percent.

“The people who take out these loans are typically in a precarious financial situation to begin with,” said Peterson. “When people take out payday loans, they take on a debt that can rapidly turn into yet another major financial obligation — and quite often, they don’t really understand just how high the interest rate is for one of these loans.”

Peterson and co-author Steven M. Graves, an assistant professor of geography at California State University, mapped payday loan locations in 20 states, including 109 military bases.

They found that ZIP codes near military bases consistently had higher numbers of payday lenders than nonmilitary ZIP codes of similar population and demographic makeup. In almost every state, military towns ranked among the highest in number of payday lenders per capita.

“While the clustering of payday loan outlets near military bases has been well known, the Graves-Peterson study is the first nationwide study to document that payday lenders target military consumers for their high-cost, high-risk loans,” said Jean Ann Fox, director of consumer protection for Consumer Federation of America, an organization that opposes the spread of payday lending. “Hopefully, this report will lead Congress and state legislatures to enact effective consumer protections.”

Military personnel make good targets for the payday loan industry, Peterson said. Junior enlisted personnel are often in their late teens and early 20s, and have low salaries and little experience managing money. Many are also married and have families. Payroll errors are not infrequent in the military, and young families often find themselves struggling on a fraction of a normal paycheck while waiting for those errors to be cleared up.

Because the military frowns on nonpayment of debt — delinquent soldiers can face demotion, loss of security clearances, and even discharge — lenders can be confident they will be repaid.

“The military’s seriousness about personal debt is a plus for the payday lenders,” said Peterson. “It also means that a payday loan can have truly tragic consequences for someone in the military. It can ruin a career.”

To correct the problem, the authors of the study advocate a return to strict enforcement of usury laws, which ban lending at a high rate of interest. The current resurgence in payday lending began in the early 1990s, as lenders found loopholes to skirt the usury laws.

“We’re asking our soldiers to put their lives on the line for us, and in the current wartime environment, there’s a lot of incentive for politicians to show that they support the troops,” he said. “Simple enforcement of existing laws on payday lending would be unquestionably good for the troops, yet very little is being done.”

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Published: March 29th, 2005

Category: News

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