The Defense Department has launched a new effort to educate servicemembers about the dangers of borrowing from "loan-shark" lending companies and to teach them how to avoid ending up in a spiral of compounding debt.

The most prevalent type of loan-shark lending affecting military personnel is what is known as "payday loans," said John M. Molino, deputy undersecretary of defense for military community and family policy. "A payday loan is essentially a plug - money that gets you from today to the next payday so you can cover your bills."

The problem is that money is very expensive: "Typically, a payday loan of $100 will cost the borrower $17 for two weeks. The average payday loan is about $500, so now we're talking about a fee of $85."

"By itself, that's not a big problem," Molino said. "However, when you consider that it is not uncommon for that military member to roll the loan over four or five times, the $85 will grow exponentially to the point where you are paying an enormous amount of money for the relatively meager amount of the loan."

"It got you through payday, but if you weren't able to pay it off, now it's two more weeks, and two more weeks, and you're paying nearly 500 percent interest annually. That's a lot of money to pay," he said.

Considering that about 9 percent of all enlisted personnel and 12 percent of all mid-level non-commissioned officers use payday loans, the potential for detrimental impact on mission accomplishment is very real, Molino said.

"If you're in debt, you have other things on your mind. You're doing things other than concentrating on the mission; maybe you're taking on other employment. The effects are long-lasting and go deep into a person's performance; it affects unit readiness," Molino said.

Part of the problem is the proximity of payday lenders to military installations. "If you look at where they position their businesses, they are right outside the gate," Molino said.

A recent study of 15,000 payday lenders in more than 13,000 ZIP codes in 20 states that host military installations revealed that payday lenders open their storefronts around military installations.

Molino said the DoD is taking steps, such as hosting fairs at military installations, to educate military members about the dangers of payday loans and familiarize them with ways to put themselves and their families on a sound financial footing.

"We can make soldiers smarter," he said. "We can make them better consumers; we can teach them how to save for a rainy day, so when they need to borrow they can
  - and pay themselves back, at no interest."

Molino said his office is closely watching payday lenders, looking at behaviors and patterns that are inconsistent with state law and encouraging states to pass laws that are not only friendly to servicemembers but also require honesty and discipline on the part of payday lenders.

Molino cited Georgia, Florida and Oklahoma as examples of states that have taken positive action against payday lenders. Last year, Georgia passed Legislation that eliminated payday lending from the state, he said, while Florida and Oklahoma now require a 24-hour waiting period between payday loans, thus eliminating rollovers and multiple loans.

"We believe we need to work hard to limit the impact of payday lenders, but the real answer is to help our servicemembers and their families get control of their own finances to be in charge of their future," Molino said.

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