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Military Families: Avoid Predatory Lending and Put Your Finances First

Sep 12, 2020 4 min read Eric Rosenberg

Key Takeaways

  • Payday loans are risky, yet can be common for military households.
  • Automate your banking to help avoid costly mistakes like missed payments.
  • Create an emergency fund and borrow money from yourself.

Military families deal with unique financial challenges that many civilian families never encounter. With frequent moves and overseas deployments, it's easy to miss a letter in the mail or have a payment slip through the cracks, causing long-term damage to credit scores and credit reports.


"Military families have the same struggles as any other American family: paying off debt and saving for financial independence. However military families also struggle with frequent transfers around the globe," says Doug Nordman, author of The Military Guide to Financial Independence and Retirement and founder of The-Military-Guide.com Opens in new window. ( Learn more about Doug Nordman's Story on Prudential's Everyday Bravery podcast Opens in new window.)

In this country, 78% of the population1 lives paycheck to paycheck, and most don't have to deal with the money strains that military households do. Unfortunately, predatory lenders know this, and they flock to bases and military-heavy communities looking to profit. Once you understand how these lenders work, you can better understand why your family should take steps to avoid them.

The scale of predatory loans and the military community

Payday loans charge some of the highest interest rates Opens in new window anywhere and often lead borrowers into a spiral of growing debt.

In 2006, Congress passed the Military Lending Act Opens in new window to protect active duty, reserve duty, and active guard service members with a 36% interest rate cap. That is much better than the typical payday loan rate, but still a source of financial harm for most borrowers. Even high-interest credit cards rarely reach 30%. Being aware of competitive interest rates can help families avoid the many "payday loan alternatives" that are merely another version of the same high-interest, short-term loans you get from a payday lender.

"The most important factor to avoid predatory lending is to avoid needing it in the first place," says Air National Guard member Ryan Guina, creator of the financial website The Military Wallet. "This means building an emergency fund and trying to avoid taking on too much debt."

By creating a financial plan, you can avoid the need for loans in the future. Military households have the most reliable paycheck there is, and with the right tools and strategies, military families can turn around difficult financial scenarios and build a strategy for long-term prosperity.

Automate your finances to put savings on autopilot

Automating your payments is one of the easiest ways to ensure your bills get paid. When you miss a due date for a credit card, mortgage, or other loans, it can show up on your credit report for seven years. Because it takes the better part of a decade to fix credit, it is much better to avoid missed payments as much as possible.

To make sure you have enough cash in your checking account to cover the bills, schedule payments near your payday, stick to a budget, and check in on your bank account regularly. Also, look for a checking account with no overdraft fees or fee-free overdraft protection options, just in case.

Choose a method to pay off existing debt

The "debt snowball" is a popular debt payoff technique popularized by personal finance guru Dave Ramsey. With a debt snowball, you list out all of your debts and pay as much as possible toward the card with the lowest balance each month, paying just the minimum balance on the rest. Over time, your debt payoffs will snowball, and you'll see bigger and bigger results each month as you chip away at your debt.

The "debt avalanche" method follows a similar pattern, but you pay off debts in order of highest-to-lowest interest rate as you get on track toward debt freedom.

"A snowball gives a quick win with smaller debts and rapidly redirects the additional savings to paying off the larger debts. An avalanche pays off the debt with the highest interest rate first, and it's the more efficient method — but it may be hard to see the progress," says Nordman.

The strategy you use to pay off debt is not as important as the long-term goal and results. Get out of debt as quickly as possible to save money on interest and turn your monthly debt payments into monthly savings.

Find financial freedom with an emergency fund

The 2019 Economic Well-Being Survey Opens in new window from the Federal Reserve found that 57% of Americans could not afford a $400 emergency from savings. A broken-down car or furnace could easily cost $400, which is why the low saving rate is so alarming.

If you can stash away just $10 or $20 per paycheck, you can build an emergency fund that serves as a cash source when an unexpected expense hits and payday is still a few days away. It's a much more affordable — and lower stress — approach to managing your money.



What you can do next

Schedule automatic payments for your credit card, mortgage, and utility bills, making sure that the payment day syncs with your payday schedule. Set an emergency fund goal for the year, and then break it down to monthly or weekly savings goals.


1. Emmie Martin, "The government shutdown spotlights a bigger issue: 78% of US workers live paycheck to paycheck," CNBC, Jan. 9, 2019


Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. You can connect with him at Personal Profitability or EricRosenberg.com.


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