Myths & Truths about your military credit options

What is predatory lending?

MYTH: Only banks and military credit unions on military installations can be trusted to avoid using "predatory lending" practices on those looking for military credit.
TRUTH: Military credit loan seekers should know predatory lending is a "practice," not a particular type of financial institution, and location is simply not a factor. Predatory lending occurs when any financial institution offers triple-digit annual percentage rates (APR), employs practices that generate excessive fees or engages in deliberate deceptions which hide details about military credit from unsophisticated borrowers. Predatory lending can include payday lending, title pawn lending, bank and credit card overdraft fees, mortgage lending, or any other form of deceptive military credit lending. The targets of these practices are frequently sub-prime borrowers, which is a characteristic of a significant portion of service members.

Non-prime and sub-prime loans

MYTH: Non-prime or sub-prime loans are harmful to service members' financial readiness.
TRUTH: Non-prime and sub-prime lending provides can access to military credit for consumers who are unable to qualify for a lender's "prime" rate because of a poor or limited credit history. Even though credit history and credit scores help determine the interest rates consumers earn, there are perceptions that all non-prime and sub-prime rates are "predatory," which simply isn't the case. For those who are not eligible for "prime" rates, non-prime and sub-prime lending offer consumers access to funds and provide an opportunity to build a more robust credit history. In a service member's case, the ability to receive military credit can improve credit scores and building a better credit profile can help improve financial readiness, not detract from it.

Installment loans versus credit cards

MYTH: Low interest credit cards are better choices than installment loans because of the lower interest rates.
TRUTH: Credit cards and other revolving credit choices are not always a consumer's best option. With credit cards, there can be hidden costs such as late fees, overdraft/charge fees and rollover charges that can quickly drive up the cost of borrowing. Understanding these costs is a key to understanding what the best deal is when considering military credit options. Sometimes a lack of disclosure can contribute to these myths as well. Many advocates promote a singular form of price shopping—interest rate or annual percentage rate—when in fact the term of the loan is a critical factor of actual COST! These advocates are quick to point that a 90-day $300 military credit loan at 34.95% is a bad decision, while borrowing $300 at a cost of $17.34 is a much better deal—when in fact they represent the same loan option. Credit card minimum monthly payments often cover little more than periodic interest—it can literally take years to pay off a credit card balance. Without a fixed term, an important component of an installment loan, the borrower does not have a plan to get out of debt. Either way, consumers should obtain as much information as possible before selecting any form of loan, military credit or otherwise, before determining whether a credit card or a military installment loan is better for their situation.