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Avoid payday loans; try your bank first

Feb. 21, 2007 - 10:52AM   |   Last Updated: Feb. 21, 2007 - 10:52AM  |  

Listen up. The Federal Deposit Insurance Corp. is looking out for you, encouraging banks to offer affordable loans for the military community.

Bankers who attended an FDIC conference in December developed a "military small-dollar loan template," which has been published by the FDIC on its http://www.fdic.gov">Web site.

It offers options for banks to consider when developing their own small loans. "Clearly, this type of bank loan product is a better alternative for the military than detrimental loan products offered by high-cost payday lenders and others," the FDIC states in its explanation of the template.

The message to you, as a bank customer, is to check with your bank to see what options it offers for short-term loans before you go to another, more expensive source. If it doesn't have such an option, talk to the management. Ask them what they can do for you, and what they're planning.

By far, the best option is to save enough money so that you don't need to borrow for those emergencies. The "Military Saves Week," from Feb. 24 through March 4, will highlight the importance of saving money and spending wisely. On-base banks and credit unions will participate in the campaign, with information about products that can help you, including payday loan alternatives.

Many military banks or credit unions offer a small loan with some of these characteristics; a number of them shared their models in developing the FDIC's prototype. They include the Tinker Air Force Base branch of First National Bank of Midwest City, Okla.; the Eisenhower National Bank at Fort Sam Houston, Texas; and Bank of America Military Bank.

Your options include financial institutions with locations worldwide, as well as those tailored for one military base or a few. While many of the financial institutions on the installation will look at these options, others outside the gate that do not have an official relationship with the military base will also look at these ideas. The FDIC says it is encouraging more financial institutions to use whatever model best serves the needs of military families.

Here are some features in the FDIC model that banks are or will be considering:

•Loan amounts up to $1,000. Most short-term emergency loans are in the range of $500, as well as other loans that help rescue service members from the treadmill of high-cost payday loans or other debt.

•Amortization periods of up to 12 months. Allowing a longer period to pay back the loan is less burdensome to the borrower than a two-week period required by some high-cost lenders.

•Interest rates of 12 percent to 18 percent. Some of the lenders who spoke at the conference said they can make some profit in this price range, and it's far less burdensome than the annual percentage rate of more than 300 percent charged by some lenders.

•No prepayment penalty — no extra cost if the borrower pays off the loan early.

•Low or no origination fees, which is money charged for taking out a loan.

•Mandatory saving component — 5 percent or more of the loan payment. For those who have not saved money previously, this gives a taste of what it's like to build up some money as a financial cushion for future emergencies without borrowing. It also provides the borrower with a source of money to make a payment if funds are not available, and it provides the bank with an "anchor" to continue the relationship with the customer.

•Direct deposit and Internet or telephone banking. Allowing direct deposit of some or all of the borrower's pay, and letting the borrower transfer payments from the account to the loan by Internet or cell phone, provides convenience for busy military folks.

•A quick, easy application and approval process. It should take no longer than it takes a payday lender to make a payday loan.

Financial institutions should also try to provide financial education to military personnel who request small loans.

Check out that used car

Carfax, a provider of vehicle-history information, has issued an alert that flood-damaged cars have been "washing up" in areas around the country in the wake of Hurricane Katrina and other storms. Water damage can wreak havoc on important features such as electrical and safety systems.

Carfax uses the unique vehicle identification number to generate a detailed vehicle history report on any used car or light truck. An unlimited vehicle history report costs $24.99 and provides information on total loss accidents, mileage (odometer) problems, lemon history, and fire and flood damage.

Under Carfax's buyback guarantee, if a car is purchased with Carfax vehicle history reports that do not contain incidents reported to the Department of Motor Vehicles, the company will buy it back.

Check it out. Make sure that good deal on a used car is really a good deal.

Got that? You're good to go.

Questions? Comments? Contact staff writer kjowers@militarytimes.com?subject=Question from ArmyTimes.com reader">Karen Jowers at sgtshopper@militarytimes.com">sgtshopper@militarytimes.com.

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