Can I get a short-term loan if I’m active duty or a military spouse?

Many perks can come with joining the military — both tangible benefits like education assistance and specialty training as well as the intangible pride of being a part of the elite who serves their country.

Another of these benefits is strong protections against unfair and predatory lending, including caps on the APRs that lenders can offer. This can help you breathe a bit easier when applying for a short-term loan.

Are payday loans for the military legal?

The short answer is no. Lenders are subject to the Military Lending Act (MLA) — a law intended to prevent lenders from gouging military personnel with exorbitant interest rates and fees that come with payday loans, tax refund anticipation loans and car title loans.

Active-duty military members and military spouses are protected under this act that requires:

• A 36% cap on interest rates. This cap is on interest rates on loans with terms under three months. While still high, a 36% interest rate is far more reasonable than the three-digit APRs that can come with some short-term loans.
• No mandatory waivers of consumer protection laws. A lender can’t require you to submit to mandatory arbitration or ask you to give up your rights under state or federal laws, as they can with the general public.
• No mandatory allotments. A lender can’t make you agree to a voluntary military allotment — or automatic repayments from your paycheck — for loan approval.
• No prepayment penalty. A lender can’t charge you a fee or other penalty if you find yourself able to pay back your loan before the end of your terms.

Loans that are not covered under the Military Lending Act

Keep in mind that some short-term loans fall outside the realm of payday loans. These loans are typically referred to as “installment loans” and come with longer repayment terms and lower (but still expensive) interest rates.

Moreover, the MLA typically doesn’t cover credit that is secured by the property being purchased. Examples of these types of loans include:

• Residential mortgages, mortgage refinances, home equity loans or reverse mortgages
• A loan to buy an automobile, where the credit is secured by the automobile you’re buying
• A loan to buy personal property, where the credit is secured by the item you’re buying

Given the Military Lending Act, do I need to worry at all when taking out a short-term loan?

Unfortunately, while the Military Lending Act forbids specific predatory lending to military personnel, it doesn’t cover most secured loans. This means that you can still fall prey to unscrupulous lending when looking for residential mortgages, traditional auto loans or loans secured by the property you’re buying — like a loan through a retail store for home appliances.

Still other lenders have found ways to work around the specifics or bend the rules of the law by designing loans that are nearly indistinguishable from loans rendered illegal by the act.

If you believe that your consumer loan violates the Military Lending Act, you can submit a complaint with the Consumer Financial Protection Bureau.

Loans available to military members and their families

As a member of the military or a military dependent, you’re eligible to apply from among an array of unsecured personal loans that typically come with fixed rates and flexible repayment terms.

Seeing a gap in the credit market, many lenders now offer loans for military members, retired military and their families that specifically comply with the MLA. Whether for a medical emergency or some other large expense, these loans can range from $500 to upwards of $40,000. Under the Military Lending Act, you face fixed rates no higher than 36%.

If you’re interested in government financing, learn more about federal student loans and business loans from the Department of Veteran Affairs.

How to compare your loan options

When comparing your options, first look for a loan that complies with the MLA. Then keep these factors in mind to narrow down a loan that works best for you:

• APR and fees. The APR represents the true cost of a short-term loan, including the interest you’ll pay along with any fees.
• Credit eligibility. An online lender typically requires a credit score of 600 or higher for approval, though you may find other lenders willing to take on borrowers with a lower credit score.
• Repayment flexibility. Before signing a contract, carefully read the terms and conditions of your loan so that you fully understand how long you have to repay. And confirm whether it comes with a prepayment penalty, should you find yourself able to pay off your loan early.
• State regulations. Confirm that your lender is licensed to provide services in your state of residence. Of the states and territories that allow short-term lending, some require lenders to comply with additional guidelines.

Bottom line

A short-term loan can help you when you’re in a financial emergency. If you’re a military member or dependent, you have the added protection of the Military Lending Act, which prohibits exorbitant fees and three-digit interest rates that can damage your finances.

When comparing your options, look for a short-term loan that complies with the MLA while providing the exact parameters you’re looking for.

Frequently asked questions about military loans

• Can I apply for a military loan if I'm not currently active duty?

  Military loans tend to be available to those who have fewer than 18 months remaining on their current term or are military veterans.

• What is the aim of the Military Lending Act?

  The Military Lending Act is in place to provide those in the military and their dependents with specific protections for their consumer credit transactions. The act specifies that you can’t be charged an interest rate higher than 36% on most types of consumer loans, among other significant benefits to military members.

• Who enforces the MLA?

  The MLA is enforced by the Consumer Financial Protection Bureau, an agency of the US government responsible for consumer protection in the financial sector.