Back in 2007, the U.S. military was facing a problem. Soldiers, Sailors, and Marines were (and still are) awful with money. They were racking up massive debts, and scrambling to attempt to get their heads back above water. Bad credit became the #1 reason for security clearance denials. In order to attempt to dig themselves out, many servicemembers resorted to the ever-vilified payday loan. Members of the military are great targets for these loans, as they get reliable and predictable paychecks, and are pretty easy to pursue, locate, and collect from in case of default. The payday loan office became one of the staple businesses you’d see outside every military base (along with liquor stores, tattoo parlors, pawn shops, and strip clubs).
Of course, payday loans are notorious for having ridiculously high interest-rates, when measured on an annual percentage basis. Which makes sense, given that they’re typically targeted at people with bad credit. The higher the credit risk, the higher the interest rate. But simple logic has never really been the strong point of the top military brass. They were outraged that their soldiers were being “victimized” by these “predatory” lenders. Something had to be done!
How did they decide to solve this problem? The same way the government always solves problems. By declaring certain voluntary transactions to be illegal. They passed the Military Lending Act, which in essence, made it illegal to offer a payday loan to someone in the military (in reality, it capped the interest rate you could charge on loans to servicemembers, but capped it at a rate significantly lower than most payday loans typically charged). Problem solved, right?
Of course not. Prohibition never works. Like every other ban on voluntary economic transactions, it did more harm than good. As I’ve discussed before, you cannot possibly improve someone’s conditions by making a list of their various options, and taking away the option they actually chose. What was supposed to be a victory for the troops against the evil lenders who wanted to exploit them has simply caused servicemembers in financial distress to be forced into even worse options to obtain short-term cash.
Now that the payday loan office is unavailable to them (for their own good, of course), many have resorted to simply overdrafting their checking accounts. What do you know – it turns out the fees associated with that are pretty high – possibly even higher than the interest on a payday loan. This one is going to be a lot tougher to solve. Then again, when all the government has is a hammer, everything looks like a nail.
You see, overdraft fees are another common enemy of the anti-banking agitators. Calls for them to be capped (not just for the military, but for everyone) are rather common. Would this solve the problem? Of course not. It would just eliminate one more viable option (as well as causing banks to increase other fees to compensate, and/or eliminating a useful program that many people use responsibly for emergencies only).
If we were taking odds on how Congress and the DoD will respond to this phenomenon, the smart money would be on yet more restrictions and regulations on voluntary economic activity. Economic knowledge is severely lacking in the government in general, and in the military specifically. It’s an autocratic culture that presumes any problem can be solved by barking orders at people. But these problems won’t go away with more bans. People who need short-term cash, military or civilian, will find a way to get it. Making it harder will only serve to force them into even worse situations than before. As always, the best way to help those in need is to give them more, not fewer options.
P.S. A ban on payday loans specific to military personnel is in fact legally enforced segregation. Consider what the response might be if a business, even a commonly hated and vilified business, decided on its own accord, that it would refuse to serve any customers who happened to be in the military. Even if they justified it in the name of patriotism and protection, the negative PR would be tremendous. Imagine a smoke shop refusing to sell cigarettes to military personnel (because it’s bad for their health, and our soldiers deserve to be protected). The public outrage over this “discrimination” would be off the charts. The business would likely be sued and forced to reverse such a policy. But when it’s the government forcing businesses to discriminate (as was done in the Jim Crow south), people just seem to shrug it off.