The myth that “non-prime” and “sub-prime” loans are harmful to service members’ financial readiness is just that-a myth. Responsible, risk-based pricing of loans allows those who have other than pristine credit, or no credit history at all, access to needed funds.
In order to better understand risk-based pricing, one only needs to look at the way car insurance is priced, as it is very similar to sub-prime lending. The higher the risk attributed to lack of experience or the probability of a claim/default, the higher the insurance premium or loan cost.
According to one CRL study, active-duty military personnel are three times more likely than civilians to use a payday lender, and one in five used the service last year. The study also notes that this costs military families more than $80 million a year in fees.
While the rates may be higher for non-prime and sub-prime risk customers, they can find responsible alternatives for insurance and loans. Access to insurance or loan products provides military families an opportunity to build a robust track record typically reflected in credit scores, credit history, or driving records. In a service member’s case, this ability to improve credit scores and build a better credit profile can help improve financial readiness, not detract from it.
Furthermore, service members should note that higher rates or costs are not necessarily indicative of “predatory lending.” The term “predatory” refers more to poor practices than to specific industries, companies or products.
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