Military Predatory Lending: Check-Cashing Stores, Payday Lenders, Pawnshops, and Rent-To-Own

It’s a sad and too-common sight just outside the U.S. military bases: A gauntlet of pawnshops and payday-loan shops alongside fast-food restaurants and liquor stores. These shops are anything but beneficial to service men and women.

By locating themselves at the base’s entry/exit, the shops take advantage of the financial vulnerability of service members whose starting pay is about $21,000.

Instead of serving those who serve the nation, these shops prey on borrowers by charging high interest rates and outrageous fees.

There are ways to avoid these common financial drains; service members do not have to give these businesses their money. There also are ways to climb out of debt if you fall down the drain.

The important thing to remember is that these “shops” are not set up to help the service members. They are set up to help the shop.

Rent-to-Own Stores

Moving is never fun, and some find it’s costly to move appliances. It may be wise to donate an older TV or washing machine to a charity rather than pay to have it shipped.

How to replace it? Rent-to-own! You agree to pay a weekly rental fee and, in time, you’ll own the TV or appliance. Just be warned: This is an expensive way to buy an item.

Let’s say you see the TV at a department store and it costs $400, but you don’t have that much cash. Instead, you agree to a rent-to-own plan for the same TV. For $15.95 a week, you’ll have the TV you want, and in 78 weeks, you’ll own the TV.

Sound appealing? It’s not. Not when you break down the numbers:

• Weekly Rental: $15.95 x 78 weeks = $1,244.10
• 5% Sales Tax: 80¢ x 78 weeks = $62.40

Your $400 TV winds up costing $1,306.50.

A better option would be to buy a used TV or save your money until you have the $400.

Check-Cashing Stores and Payday Loans

Check-cashing stores offer convenience, but that’s all they have to offer.

These stores charge exorbitant fees, and do not benefit the active-duty service member.

In general, the fee at these check-cashing stores is around $4 for each $100. This may not sound like much, but it is when compared with the alternatives. A bank or credit union account should offer you free check cashing services. If you haven’t had time to open a bank account and need to cash a small, personal check, see if your base has a military exchange that will cash your check for free.

Many off-base check-cashing stores also make “payday loans” to military personnel and other individuals who work full time. These are dangerous propositions best avoided; they typically bring high interest rates and high fees. They are akin to folding $100 bills into paper airplanes and throwing them out a second-floor window.

The federal government had limited these loan interest rates to 36%, but in 2018 the Consumer Financial Protection Bureau stopped enforcing that limit. That rule was reversed in June of 2021.

In July of 2021 a group of 188 civil rights and consumer groups signed a letter to Ohio Senator Sherrod Brown, Chair of the Senate Committee on Banking, Housing, and Urban Affairs. The letter called for the cap – which at 36% is scary enough — to be reinstated permanently.

The letter states without the cap lenders are charging in the triple digits for interest rates. When an individual can’t repay the loan, he or she gets trapped in a cycle of borrowing at ridiculous rates, meaning 80% of any payment on a payday loan goes to the interest on the loan. The loan goes on, seemingly forever.

It’s just not wise to borrow money this way. How do payday lenders work? Let’s say you need $100 …

• You show the store whatever proof they need that you can cover the check – pay stubs, bank account balance or other paperwork.
• The store asks you to write them a check for $120. The store agrees not to cash your check until you receive your next paycheck, usually a week or two.
• You get back $100 in cash. The store keeps the extra $20 as the fee for the loan. Most stores charge between $15 and $30 for a payday loan.
• The store cashes your check on the agreed-upon date.
• The lender then automatically withdraws the money when due – whether it fits your budget or not.

What happens if you don’t have the money in your checking account to cover the check? For another $20 fee, you can extend the loan. This cycle usually can keep going and going — as long as you pay the fees.

In time, you could end up paying anywhere from 399% to 650% in fees and interest charges, which means that $100 could cost you $650.

Something that seemed easy and convenient winds up carrying a hefty price. The lender has exactly what it wants. It sold a high-interest loan to a vulnerable service member and (potentially) trapped that person in an endless cycle of debt.

“Veterans who have fought for their country deserve better,” Paul Kantwill, Founding Executive Director of the Rule of Law Institute at Loyola University Chicago and former director of the Office of Servicemember Affairs at the CFPB, wrote in an op-ed.

He’s right. There are so many better options than using payday lenders.

For starters, many bases offer financial counseling services. People in these offices have helped many young military families get financially stable. Another option may be a short-term personal loan from a credit union or bank. It may be difficult to talk to others about your financial problems, but services are available to help — and they cost much less than payday lenders.

Pawnshops and Title Loans

Some people use pawnshops as a way of getting quick cash. It can sound appealing to get some money in exchange for Aunt Mary’s antique vase, no? But, a pawnshop rarely gives money equal to the item’s worth. In fact, pawnshops are famous for paying a small fraction of the item’s value.

Many pawnshops also make loans based on car titles. These loans are risky and could lead to losing your car.

Consider that you have a car worth $5,000 and you decide to get a title loan from a pawnshop. The pawnshop is likely to loan you about $1,000 — in exchange for the car title.

Let’s say you agree to pay the loan back in six months. The pawnshop will charge you about 10% per month on the loan.

This is what your $1,000 loan could cost you:

Loan amount $1,000 (pawnshop keeps the title to the car, worth $5,000) + interest charged $600 (10 percent a month equals $100 for each of six months) = total cost $1,600.

As you can see, $600 is a lot of interest to pay on a $1,000 loan for six months. But if you fall behind in your payments, you’ll face even more charges.

The pawnshop could even have your car repossessed — and charge you a fee for the repossession. If your car is stored on a lot, you’ll be charged a storage fee. If you fail to pay all these fees, the pawnshop has the right to sell your car.

This is a high price to pay for a $1,000 loan.

Consider other options.

Tips to Avoid Taking Out Bad Loans

The best way to avoid these traps?

Avoid the enticement of the short-term fix. There’s a reason those shops are set up so that service members see them every time they leave and enter the base. They’re meant to be enticing when in fact they are anything but beneficial.

What are some of the best tips to avoid these loans?

• Assess what you are doing honestly: If you need a quick fix for cash, you may be overspending or not budgeting carefully. Assess what you are doing and be critical of decisions.
• Ask questions: You can demand a detailed list of fees and costs. Do it. Find out what you are getting into and how much it’s going to cost you.
• Educate yourself: Read about these lenders before walking in the door. One search will be eye-opening.
• Read before signing: Know the details. One night on the town is not worth the long-term financial headache of a predatory loan. Know what you are signing before signing.
• Avoid balloon payments: This payment means you may make a few small payments before one large one – the balloon – is due. This loan is designed to keep you in debt because lenders know that many who take the loan will not have the balloon payment money when it’s due, thus causing more borrowing and more fees and more interest.
• Avoid prepayment penalties: This is a gimmick cooked up by the lending world to gain money from unsuspecting people who pay back the loan early. If that $1,000 you borrowed is due in a month and you have the money to pay it in two weeks, you should be able to pay the balance without a penalty. Ask directly: Are there prepayment penalties? If the answer is yes, find another loan.
• No is a good word: It’s short, simple and direct. If it doesn’t feel or look right, don’t do it. Say no and seek a better option.
• Be wary of targeted practices: This is common sense. There’s a reason these shops are set up where they are. It’s to make them seem beneficial when they are anything but. The tortoise beat the hare for a reason. Slow and steady wins the race.
• Traditional approaches work: Banks and credit unions may not offer the “easy” way to cash, but they are a far safer way to find help. Many financial institutions will work with service members to help them. The predatory lenders work to help themselves.

The terms predatory lending practices and military predatory lending are used for a reason. A predator eats its prey. These lenders will consume as many dollars of a service member’s capital as they can, all to benefit the lenders.

Digging Out of Debt

It’s easy to fall into debt — especially if you are in the junior ranks in the military and are supporting a growing family. What can you do if you know you’re carrying too much debt? First, don’t feel overwhelmed. Debt can be managed. Start by taking at least some of the following steps:

• If you think you can’t make a payment on a debt, call the business you owe money to and ask for more time. If you make the call before you miss a payment, the business often will be more willing to work with you.
• Talk with the financial counseling personnel on your base or post. They can offer suggestions to get out of debt and let you know about financial assistance programs for military personnel and their families.
• Consider working with a nonprofit debt counseling service, such as InCharge Debt Solutions. For a small fee (or maybe no fee), InCharge can help you set up a repayment plan.
• Use the debt avalanche method and organize your debts in order from the highest interest charged to the lowest.
• Limit yourself to one major credit card and only use it for emergencies.
• Consider bankruptcy, but only as a last resort. Bankruptcy will stay on your credit history for 7-10 years. This will make getting new credit very difficult. It’s better to try to work out a repayment plan with creditors.
• A nonprofit credit counselor can help you set up a debt management plan that can help alleviate the debt. This kind of plan typically turns debts into one affordable monthly, payment at a lower interest rate.