The DoD has pushed for a limit on the interest rate that payday loan companies can charge military members, claiming that the high interest rates payday loan companies charge hinder military readiness levels and destroy the morale of troops and their families.

Last October, Congress passed the “Military Annual Percentage Rate” law, which will effectively limits the ceiling for payday loans at 36% annual interest rate, including all fees charged. The law would also prohibit penalties for prepayment and all fees would have to be disclosed in writing when the loan is granted.

The law was recently published in the April 11th Federal Register (pdf file), and is open to public comments for 60 days. Afterward, some tweaking may be done before the law comes into effect October 1st. Some critics argue that there are substantial loopholes in the wording of the law that will make it easy for payday loan companies to work around this new law.

This law has the potential to effectively end payday loans to troops because most of these payday loan companies will refuse to lend to troops at a 36% annual interest rate. The difference on a 2 week loan (2 weeks in a pay period), is staggering. Most companies charge between $15-20 per $100 loan, which is over 400% annually. If the interest rate is limited to 36% annually, the amount the company can charge is reduced to $1.38 per $100 borrowed. The companies spend more than that to process checks and pay salaries. So, I imagine this sort of lending to troops would dry up pretty quickly.

Either way, it is unfortunate that military members feel they need to take out these loans. Yes, it is true that many military members do not make substantial amounts of money. But, it is also true that the military has mandatory financial seminars and classes new troops must go through. There are also groups, such as the AF Aid Society, that can financially assist members in need. I am sure each military branch has its own similar foundation.

With the proper financial education, most troops should learn to stay away from these places. And for those times where the troop was dealt a tough situation, they should feel they can go to their leadership or to one of these aid groups that are there specifically for that purpose.