It is a sad fact of life that military members and their families are often targeted by predatory lending practices, sometimes paying up to 300% interest on various types of loans. However, there is a little-known rule, called the Military Lending Act, that seeks to protect military veterans and their dependents from predatory lending practices. If you are a veteran, active service member, or the family of one, keep reading to find out what you need to know before you consider taking out a loan from your local pawn shop.
What is the Military Lending Act?
Established in 2006, the Military Lending Act (or MLA) is a federal regulation that provides many protections for veterans, active service members, and their family. Protections include:
- Capping annual percentage rate on consumer loans at 36%, including all fees, finance charges, and credit insurance premiums
- Prohibiting prepayment penalties for paying loans ahead of schedule
- Allowing service members to seek arbitration for disputes related to loans
Since the inception of the MLA, the Department of Defense has added additional rules that apply to credit cards and other types of loans, such as pawnshop loans. The rules are constantly evolving, and it is up to lending institutions, such as banks and pawnshops, to keep themselves up to date.
How does the MLA affect loans from pawnshops?
To stay compliant, your local pawn shop must confirm your military status before originating or closing your loan. This means that they must run an additional background check on you that they do not run for other customers. For example, a pawnbroker may confirm your status directly from the Department of Defense Manpower Data Center (DMDC), or one of the nationwide credit reporting agencies. However, your credit rating will not affect the status of your loan from the pawnshop, because your creditworthiness is based on the items you put up as collateral. Also, you can rest easy knowing that your pawnshop loan will not go on your credit report, nor affect your credit rating.
In fact, in all other respects aside from the additional information your pawnbroker must confirm before granting your loan, the process is precisely the same.
Here’s how a pawnshop loan works, for everyone:
Pawnshop loans are a great alternative to other forms of borrowing. Loans from banks, for example, go on your credit report and can take a long time to process. Plus, not everyone will qualify for a bank loan, especially as borrowing restrictions get tighter every year. Personal loans are always an awkward situation and are also not available to everyone.
With a pawnshop loan, quick cash is easily accessible. Even with the extra check of MLA compliance, you can walk out of the shop with cash in hand in minutes.
Loans from pawnshops are unique because they work on collateral. Meaning, the loan is secured by something of value that you own. If you happen to default on your loan, your pawnbroker takes ownership of your item, and you call it a day. However, most people tend to get their items back.
So, you would bring your item into the pawnshop, and your pawnbroker will evaluate it.
The amount of the loan varies depending on the value of the item.
Your pawnshops will base the value of your item on three things: its appraised value, current condition, and the pawnshop’s ability to sell the item. Pawnbrokers have lots of tools to help them determine the value of your item.
The appraisal process itself varies depending on the type of item you bring. For example, jewelry is evaluated differently than power tools. All items we buy or pawn at Central Mega Pawn are tested to ensure that they work correctly.
The amount of your loan will also be determined in light of other factors like local demand and condition of your item. Every pawn shop is unique and goes about the process in their way.
Then, they will make an offer of how much they can lend you against the value of your item. If you have a relationship with your pawnbroker, you can negotiate things like repayment terms and interest rates, even if the MLA already protects you.
If you pay off your loan by the end of the repayment period, you get your item back. If you don’t entirely pay it off or end up defaulting on your loan, your pawnbroker offers your item for sale, with no legal consequences to the borrower. A bank loan, on the other hand, comes with stiff penalties and punishments than can follow a person around for years, ruining their credit score and making it difficult to get jobs and even housing opportunities.
A pawn shop loan is also beneficial to borrowers because they make it impossible to go into debt. You will not be lent more money than you can afford to borrow. You will not overextend your credit with a pawnshop loan.
How does the MLA protect my family and me?
There are severe penalties for lenders who violate the MLA. In addition to fines, lenders in violation face damages and “appropriate” punishments, which mean that the consequences of violating the Act can be far-reaching.
As a vet, service member, or family of a service member, your pawnbroker must ask if you qualify for the MLA before getting your loan started. As we previously mentioned, they will run an additional background check on you, but it will not affect the terms of your loan, will not show up on your credit report, and will not affect your credit score in any way.
A short-term pawn loan can be a lifeline for anyone in need of some quick cash. Central Mega Pawn will always comply with all state and federal regulations. It is our honor to not only serve our communities but to also give back to our brave service members and their families. Visit us today and find out how we can help you.