Payday Loan Interest Rates Capped at 36 Percent

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A new federal law bans predatory lenders from taking advantage of military personnel and their families.

Check-cashing stores around military bases often charge annual interest rates of 300 percent, but the new law caps interest at 36 percent for loans to active-duty military and their families.

Marine Gregory Tackett climbs out of his truck with shiny new chrome hubcaps at a small parking lot behind the Check Mate payday loan store just outside of Camp Pendleton. The 20-year-old from Ohio hasn't heard about the new law.

"I think it is pretty messed up. I think if military members want to take out a pay day loan, that's their choice," Tackett said.

But Marines and their families can find themselves caught in a downward spiral of debt if they don't pay back a payday loan when it's due.

Payday loans are attractive to high-risk consumers who cannot obtain traditional credit from a bank or credit union. They tend to be small, short-term, single-payment loans with exorbitant interest rates.

So a key component of the military's battle against such loans is an education campaign for new recruits: teaching them how to manage their money and stay out of debt.

For example, a $300 loan that costs $50 for two weeks in order to tide over a car payment can end up costing $700 in a few months, and maybe even thousands by the time the borrower finds a way to pay it off.

The way they work: A borrower writes a personal check payable to the lender for an amount from $100 to $500, plus a fee. The check is then postdated for the next payday — typically two weeks' time — when the borrower is expected to repay the loan.

Charles Piedmont owns several payday loan outlets near Camp Pendleton.

"The boys I'm dealing with here in Oceanside, next to Camp Pendleton, are going to do three or four tours of duty," Piedmont said.

Banning him from doing business with Marines, he added, won't stop the demand for quick and easy money.

"How do you tell that young man he can't have those $1,800 wheels for his car when next month he may die?" asks Pendleton.

It's not just young, single Marines who get in trouble with high-interest loans.

Young families also are easy prey for payday lenders who are not likely to give up this clientele easily, according to Mike Hire, director of the Navy-Marine Corps Relief Society, a private non-profit charitable organization.

"Quite frankly, we are concerned about some loophole where we would be seeing more proliferation of places where they would sell you a phone card or a pizza," he said, "and for the sale of that item they would also give you cash back of say $300."

In other words, a $350 check would cover the price of the phone card or pizza as well as $300 cash advance.

Piedmont, in fact, said that he converted one of his storefronts into a pizza parlor that might also function as a check-cashing store. He denies he'll deal illegally with the military, but said there will be ways around the law.

Check-cashing stores, for instance, are supposed to cash checks immediately.

But Piedmont said if a Marine walks in with a check that can't be honored till pay day, and asks for a cash advance, the lender could simply wait for a couple of weeks — till payday — before cashing it.

"They get the money. I get the check. And on pay day, I walk it into the bank and pretend like they gave it to me yesterday," he said.

To try to foil these loopholes, the military is coming up with other options for service members who need quick cash.

For example, the credit union on the base of Camp Pendleton markets low-interest rate loans. Sales have doubled recently thanks to ads featuring images from the movie Jaws (the 1975 Steven Spielberg thriller about a gigantic, menacing great white) and the warning: "Avoid the loan sharks!"

Maj. Gen. Michael Lehnert, head of Marine Corps Installations West, said this is a priority for the military because high debt affects Marines' ability to deploy.

"We need every Marine we can get. We want them to go forward with their heads in the game," Lehnert said. "We don't want them to have to worry about whether they can make their car payment when they're in Fallujah."

Alison St. John reports from member station KPBS in San Diego.

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