Short-term lending products bridge a financial gap for their users, but the rates that are charged (sometimes obscured as ‘fees’) can verge on predatory. Most consumers avoid these products, but active members of the military seem to embrace them. For those who are enlisted there are some protections under the law that even go above and beyond the recent CFPB regulations, but considering how popular these products are with active duty military, one has to wonder if this law has just encouraged a bad financial practice and what the implications of that are.

Regardless of the product, usage rates of short-term loans are incredibly high among active duty members of the military. This is despite a concerted effort by the US armed forces to promote fiscal responsibility and deter their active duty members from obtaining alternative lending products.  Overall, 44% received a payday loan last year and 68% obtained a tax refund loan – that is extraordinarily high. For context, less than 10% of all consumers obtained a payday loan or tax refund loan in the same year. 

Why is this happening?  At least part of this phenomenon can be attributed to age as Gen Y consumers generally are higher adopters of these services because they are earlier in their financial lives, earning less income and in possession of less traditional forms of credit.  But that doesn’t tell the whole story.  With the explosion of digital financial services this differential cannot be explained by a lack of accessibility.  Is there something more?  Why are these products so attractive to a segment of the population with a very regular paycheck?

It could be a function of unintended consequences.

Military members have some protections from the predatory aspect of short-term loans. In 2006, the Military Lending Act (MLA) was enacted to address predatory lending.  The act limits the interest rate that can be charged to military members for products like tax refund loans and payday loans to just 36%1. The intent of the act was to prevent our military from being shackled by loans while they were overseas, which could induce stress and hamper their ability to focus.  But even at the interest rate cap, they are still paying high rates – the kind that is typically reserved for consumers with bad credit.

The question becomes, considering that so many members of the active military are younger and may not have that much in the way of established credit, has the MLA legitimized these products for members of the active military and actually driven usage higher than it would have otherwise?  And is that delaying progress towards obtaining mainstream financial products with more favorable terms?

It is possible.  

With financial fitness being such an important factor to our military, it is evident that more must be done to not only encourage good financial habits, but to build a pathway to the use of more traditional financial products. In that way, active duty members of our military will more quickly gain access to fairly-priced financial products that subsequently help them avoid falling into a short-term lending trap that could extend far beyond their service. 

Special thanks to James Wilson for his help with this topic.


About Al Pascual

An accomplished industry analyst, market researcher, and financial industry practitioner, Al Pascual is Javelin’s Senior VP of Research and Head of Fraud & Security. As SVP of Research, he oversees the firm’s operations and ensures that Javelin’s research content provides the innovative perspectives that clients expect from the firm.

As Head of Fraud & Security, Al provides clients actionable insights on a variety of fraud and security issues, acts as a partner in developing strategies for managing risk, and identifies and raises awareness of future threats and solutions. Al researches a range of topics, including the applicability of biometrics in banking and payments, the effect of data breaches on the integrity of consumer identities, the relationship between identity fraud and loyalty, and the best methods for securing data and transactions.

Al has presented findings from Javelin’s rigorous, industry-leading research at conferences around the world, including BAI, CARTES, Money20/20, NACHA, and RSA. Al has provided commentary on fraud and security issues to media outlets such as American Banker, Bloomberg, CNNMoney, Fox Business, Reuters, The New York Times, The Wall Street Journal, The Washington Post, and Wired.

Previously Al held risk management roles at HSBC, Goldman Sachs, and FIS. He is a member of the Association of Certified Fraud Examiners, the International Association of Financial Crimes Investigators, and the Federal Reserve Secure Payments Task Force. He earned a Bachelor of Arts degree in History from the University of South Florida.

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