How Our Soldiers are Being Massively Ripped Off

May 19th 2015

Ashley Nicole Black

Predatory lending is a huge deal, and it probably affects you in more ways than you'd imagine. Predatory lenders convince borrowers to accept unfair, unneeded, or non-industry standard loan terms through coercion, deception, or by taking advantage of their lack of financial knowledge or desperation. Not only does this practice ruin people's lives and finances, it can also make it more difficult for them to obtain legitimate credit. This keeps them in a cycle of debt and poverty. Even if you've never been a victim of predatory lending, it still affects you because it creates a drag on the entire economy. For example, subprime mortgages (predatory home loans) were a major factor in the economic collapse of 2008.

Predatory lenders target the already disadvantaged.

Predatory lenders target disadvantaged groups that do not have access to traditional loans, either because of bad credit or because of discrimination. They also target people who are in moments of financial desperation -- people who have large medical bills, need home repairs, or who are struggling with car payments.

Predatory lenders offer short-term loans such as payday loans, tax refund loans, car title loans, and overdraft protection loans. They come with with high fees, high interest rates, and short repayment schedules. For many, these terms make the loan difficult to pay off and often cost borrowers far more than the value of the loan. Payday loans, for instance, are often two-week loans with extremely difficult requirements for repayment. The result is that, according to Pew, the average payday borrower spends $520 on interest for a loan of $375. That leaves them in debt for five months for taking out a two-week loan. Even worse, some loans have prepayment penalties, which ding you with fees for paying your loan ahead of schedule. According to the Huffington Post, more than 12 million people use payday loans.

These lending practices insure that, whether or not a borrower's income improves, they are stuck overpaying for their loan -- making it difficult for families to build wealth and get out of the cycle of debt and poverty.

The military and veterans are particularly vulnerable to predatory lending.

Predatory lenders also target American soldiers and veterans, who are particularly vulnerable because they often have low financial knowledge (many join the military straight out of high school and receive little to no financial literacy instruction), come from economically disadvantaged backgrounds, and are generally low-income. Multiple deployments can make it difficult for them to keep up on payments, and they are ripe targets for predatory lending because of their consistent, stable paychecks. Predatory lenders target them by sending unsolicited, misleading loan materials that are designed to look like they come from the government and by encouraging them to take out loans for more than the worth of their homes (particularly disabled veterans, who intend to use the extra funds to upgrade their home so that it will be wheel-chair accessible).

Taxpayers end up paying for these practices because the government backs veteran's home and school loans, so lenders are guaranteed to collect at least the 25 percent government-backing after the vets default. The veteran is left with ruined credit or is homeless, while the lender still makes money off of taxpayers.

Congress has passed legislation to help protect service members. It includes a cap on interest rates at 36 percent for loans to military families. Even after Congress passed these protections in 2006, there were still loopholes. Those were not patched until 2012. The loophole fixes, though, have not yet gone into affect, and House Republicans have attempted to delay them for another year at the request of the banking industry.