The Department of Defense has asked Congress to approve a cap on the interest rate that payday loan companies and other lenders can charge service members and their families.
In a report to Congress, the Defense Department examined predatory lending by companies that provide short-term loans (payday, car title, and tax refund anticipation loans) and installment loans (unsecured loans focused on the military and rent-to-own).
The department said military families are an attractive target for predatory lenders because service members have a reliable source of income and many are young without a lot of experience managing finances.
The department said lawmakers should prohibit lenders from charging rates in excess of a 36 percent annual interest rate with regard to extensions of credit made to service members and their families.
Payday loans are small loans secured by the borrower's personal check or by an agreement to electronically withdraw payment from the borrower's bank account. Payday loans average about $350, are due in full on the next payday, and cost from 390 to 780 percent annual interest rate, according to the report.
The Community Financial Services Association of America, an industry group, says that payday loans offer consumers a valuable service and that payday loan fees typically cost less than customers' alternatives, like bouncing a check or paying a credit card late.
Thirty-nine states allow payday loans, according to the report. The Defense Department report said payday lenders are heavily concentrated around military bases in states where payday loans are legal.