Military Loans Information

Payday advance military loans (also called payday loans or paycheck advances) are short-term loans for small amounts of money (relatively speaking) and are meant to cover cost’s until your next payday.  Usually they range from $100 to $500 with two weeks until they are due.  They are marketed by the lender in terms of fees, as opposed to interest rates, due to their short term nature.  For two week loans, fees are usually $15 per $100 (however, they do commonly range from $10 to $30 depending on the lender).  Another term referencing this type of loan is cash advance, however this is usually referring to cash from an existing line of credit like a credit card.

Payday Military Loans Calculations

In order to compare the cost of the loan to other sources of military loans, you may want to correlate the fees for payday loans to an interest rate (or APR):

• For this example, we’ll assume a $100 two-week loan with a $15 fee. 
• The first step in this comparison would be to convert the time period (2 weeks) to one year (52 weeks); 52 ÷ 2 = 26.
• Next, we take our $15 fee and multiply it by 26; 15 x 26 = 390.
• This gives us an equivalent APR of 390%!

However, since a payday loan typically uses a two-week term (rather than a year), a better comparison is the equivalent annual rate (or EAR):

• EAR = (1 + 15%)26 - 1 = (1.15)26 – 1 =  36.86
• The same $100 two-week loan with a $15 fee and a 390% APR has a 3,686% EAR!

Obviously there is a big difference between the two (APR vs. EAR), and that is why you need to understand the difference when comparing different loan options.

Payday Military Loans Regulations

Payday loans are not legal in all 50 states!  In fact, in 13 states they are non-existent due to either the state outlawing them entirely or the state regulating them to a point where lenders choose to not offer payday loans.  The federal government has taken one more step to protect military members.

In the US, Congress passed legislation in Oct 2006 which capped lending to military personnel at 36% APR, effective 1 Oct 2007.  The DOD considers payday loans as “predatory”, having ruined many military members’ finances, jeopardized security clearances, and interfered with deployments.  Using the examples above, it’s obvious that most payday loans charge a much higher APR than the 36% cap and therefore should not be an option for lenders to offer as military loans.

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Payday Loan".