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Consumer watch: Legal installment loans can still rip you off

Aug. 3, 2009 - 10:56AM   |   Last Updated: Aug. 3, 2009 - 10:56AM  |  
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Just because a company's high-interest loans comply with federal and state laws doesn't mean you should sign up for one.

When shopping for loans, make sure you know what you're getting into.

Countless Internet loan outfits specifically want service members' business that steady paycheck that can be accessed through monthly allotments.

But their business practices are not governed by the Pentagon's interpretation of the Military Lending Act, which caps the annual percentage rate on consumer loans at 36 percent for military members and their dependents. The Pentagon's interpretation limits that rate cap to payday loans, refund anticipation loans and vehicle title loans. Whether lower interest rate caps might be in force for other loans varies by state.

A Web search of military lenders shows five companies on the first page that include the word "military" in their names. For most, you won't find information about their annual percentage rate and the total cost of the loan, including interest and fees. That's a red flag.

Most note that they are not payday lenders and that their loan terms are installment loans of more than 90 days, which means they are not subject to the 36 percent cap.

Consumer advocacy groups such as the Consumer Federation of America have criticized the Defense Department's narrow interpretation.

"Hopefully, the department will ... close the loopholes in the definitions it used in the first set of rules and extend the protections to all types of credit that burden service members, especially installment loans and open-end forms of credit," said Jean Ann Fox, director of financial services for the nonprofit.

Defense officials do not believe the regulations should be broadened, said Defense Department spokesman Army Lt. Col. Les' Melnyk. "The reasons we did not include installment loans in the regulation are still relevant: There are good and bad installment loans, and we do not want to limit access to the good ones by placing blanket limitations on these loans."

A reader asked about a specific lender that has advertised in the Military Times newspapers, Armed Forces Loans of Nevada, because its APR is not printed in its advertisements.

But in the question-and-answer portion of its Web site, the company says it offers "high-interest installment loans" to active-duty members and retirees. Also listed are details on the loans' APRs, which range from 40 percent to 87.5 percent.

You don't know what your interest rate will be until you apply for the loan, said Jason Matalon, assistant office manager of Armed Forces Loans and son of the company's president, who was unavailable for comment.

The APR depends on factors such as how long the member has been in the service, the expected date of discharge and credit history, Matalon said.

The company charges fees, which vary, and are calculated in the APR. Repayment periods range from six to 36 months, and loan amounts vary from $500 to $5,000. You set up an allotment to make payments.

Here are the consequences of those high APRs:

At 87.5 percent APR, a loan of $1,000 for one year would cost you $1,534.39 to repay.

At 40 percent APR, it would cost you $1,229.66 to repay.

If you took out a line of credit with your military bank or credit union at 15 percent, you'd repay $1,083.10 over the year. By going with the 15 percent rate, you'd save $451 over the loan at 87.5 percent.

Finding out the interest rate is important. If it's not on a company's Web site, call a toll-free number and ask. Never sign anything unless you know the total cost of the loan. The lender is required by law to provide that information. Check your lender's reputation through the Better Business Bureau,">, and through state regulators.

Some options for getting an APR of a lot less than 40 percent:

Your military relief society. The societies offer short-term, no-interest loans as an alternative to payday loans.

Military-related banks and credit unions. You'll find some through the Defense Credit Union Council ("> and the Association of Military Banks of America,">

Questions or comments? Contact staff writer from reader">Karen Jowers at

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