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Payday Loans for Military – What to Know and Alternatives

Being in the military is a difficult job. As a former sailor I personally know that between deployments, transfers, and regular day-to-day events it is difficult to be financially stable. This is especially difficult for younger military members who live paycheck-to-paycheck. I was one of those people. It’s an easy thing to fall into because while you are in the military you will always have food to eat and a place to stay.  

I remember waiting for the 1st and the 15th to come to get my check and blowing the majority of it that same weekend. I’d find myself being stuck in my barracks or onboard my ship till the following payday. The cycle lasted for a long time and it became a way of life. Everything is “normal” until a black swan event happens.  

So what’s a black swan event? 

The term black swan refers to the belief by western civilization that there were only white swans because every swan ever encountered was white. That is until 1697 when the Dutch explorer Willem de Vlamingh discovered black swans in Australia. 

Nassim Nicholas Taleb developed the black swan event theory to describe unexpected events that can affect society as a whole. But the theory can also be used to describe events in our lives that happen unexpectedly. For the person who lives paycheck-to-paycheck these events can be disastrous.

In my third year in the Navy, I was serving aboard the USS Wasp stationed out of Norfolk, VA. I had just moved into my first apartment with five other shipmates and life wasn’t bad. I continued the trend of living paycheck-to-paycheck even though I was making E4 pay and received sea pay for being attached to the ship. Don’t get me wrong I always paid all my bills but I never had anything extra.

One day while driving to base my car died. I had two credit cards at the time one with a $1500 limit and the other with a $700 limit that were maxed out, so essentially they were useless. One of my buddies let me borrow the money for a tow truck. We had my car towed over to a mechanic near base and we walked to the ship.

Once I arrived, my chief spoke to me about being late. If you have ever served you know that there is never a good excuse or a believable one. I was informed that if I was late to muster again I would be given extra duties on the ship. 

Getting stuck in a payday loan cycle

Later that day, I got a call from the mechanic and told my repairs would cost about $500. I had no money to get my car back. So, I did what I thought was the answer. I went to a payday loan center and got a $500 loan at 23% interest rate. You read that right 23%!

How much did that $500 loan cost me? It meant that on payday I had to pay the $500 loan AND an extra $115 to cover the interest. 

This began a vicious cycle that was challenging to get out of and lasted for months. Having my car break down was my black swan event. I didn’t think it would happen even though the probability of it happening was high. My car never had prior issues. I didn’t even think to save for a potential break down. And true to black swan events, in hindsight, it was bound to happen.

You see what happened is that after I paid off that first loan on payday, I still needed money to get me through the next two weeks. So I had to take another payday loan just to get by until the next paycheck. Then, I’d pay off that amount but needed another loan. Basically, I was stuck paying $115 each payday for months.

I wasn’t the only one stuck in the payday loan cycle.

I talked to some friends and found I wasn’t the only one in this type of bind. One guy had a payday loan at a 36% interest rate, the max legally allowed by the 2006 Military Lending Act. Other friends had lost their Playstations and other items to pawn shops. 

During one of these conversations, my chief walked in. He called us “idgets” to grab our attention. He sat us down and gave us some important information. I sat there wishing I had known all of it prior to getting my first payday loan.

How do payday loans work for military

Payday loans are offered by financing companies called payday lenders. They offer short-term loans targeting people needing immediate cash. The entire loan plus interest must be repaid by the next payday or with the next paycheck. Often times, you may be asked to write a post-dated check with the amount due and payable on payday or the lender may request to have funds electronically debited out of your checking account.

Most payday lenders set a flat fee but these loans are often more expensive than other types. For example, some lenders may charge $10 per $100 borrowed. It doesn’t sound bad if you’re in a crunch, but if you don’t have the money to pay in full by the next payday, you risk rolling over the loan. By next payday, you can now owe $20 on a $100 loan.

There are better financial options

First, I should have spoken to Fleet and Family Services. I always knew they provided emergency money in cases a military member needed to travel due to the death of a close family member. However, I didn’t know they provided non-interest loans to military members. In the event of an emergency like my car needing repairs, I could have reached out to FFS for a loan. The loan would have been automatically taken out of my paycheck and spread throughout six months.

To break the payday loan cycle, I got a loan from Fleet and Family that helped set me free.

Second, I learned I could have also talked to Navy Federal Credit Union or USAA, two financial institutions who worked primarily with military members and their families. I was told I could have actually gotten a loan over the phone at a reasonable rate. In some instances the money would have been deposited into the account I already had with them. Giving me almost immediate access to the cash I needed to retrieve my car.

I’ve talked to sailors and soldiers who are facing the same problem I had almost 10 years ago. I continue to pass on my chief’s advice to reach out to Fleet and Family Support or Soldier and Family Support for help. Not just for an emergency loan but also to learn how to budget and save for those black swan events. It’s good to be financially prepared.

Third, I should have known there are legal protections specifically for military members. A good source is the Consumer Financial Protection Bureau’s Military section.

Plan for emergencies

My best recommendation is to know all your options available. I know it may seem easier to head to the payday loan center or the pawnshop. Don’t do it. I totally understand it may be your only recourse. Or you think it’s your only way to access emergency cash.

If you’re reading this and wondering what you can do to prepare. I want you to accept that emergencies will happen so you can plan for them. For instance, having an emergency fund where 10% of your pay is deposited each payday can build up security. You can set this up with the bank or credit union.

I use both USAA and Navy Federal Credit Union. They understand the unique careers we have and the situations we face. It’s their knowledge of our military life that makes banking with them so much easier.

To repeat one more time it’s important for you to learn more about creating a budget and setting up an emergency savings strategy. You don’t want your money messing up your military career or for that matter your entire life.

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