One of the most impacted demographics of the fast cash scheme is active duty military.
According to Capt. Mark Patton, commanding officer of Naval Base Point Loma, payday lenders often set up shop en masse outside of base entrances.
Currently, there are four to five lenders for every McDonalds, and the highest concentration of such businesses in the United States can be found near Camp Pendelton, he said.
"You can't drive down any street near a gate and not find a payday lender. They're right down Rosecrans from Naval Base Point Loma," he said.
Payday lenders argue that they offer easy credit where banks do not, but Patton said that excessive debt from such transactions has prevented enough sailors and Marines from receiving the security clearance necessary for deployment to cause notice.
"It's impacting our military readiness, and this is a time of war, so we take that very seriously," Patton said.
In response, the Navy Region Southwest has convened a task force to deal with the consequences of predatory lending through training, education and outreach to credible financial institutions.
Additionally, the group has been working hand in hand with Assemblyman Ted Lieu (D-Torrance) on a state bill that would help military customers break free from the cycle of debt.
Assembly Bill 1965 is sponsored by the National Guard Association and was originally intended exclusively for National Guard members.
It had already worked its way through the House when the Navy and Patton's task force asked that it be amended to offer broader protections to all active duty military, sailors included.
The bill will be heard in the Senate judiciary as well as on the Senate and Assembly floors in August. Patton said he hopes the bill will successfully make it out of the legislature by September and to the governor's desk by October. Should AB 1965 receive the requisite approval, it will take effect Jan. 1, 2007.
Not exactly loans, payday advances are more accurately described as deferred deposit transactions whereby customers accept cash or a direct deposit into their checking account, which is to be paid back via check or automatic withdrawal.
An advance of $255 requiring a one-time repayment of $300 two weeks later yields an annual percentage rate of 459 percent, said Patton, or nearly 700 percent if paid back in one week.
The problem, Patton continued, is that customers are expected to pay back their debt in one lump sum a few short weeks later. When they can't, lenders often encourage back-to-back loans, a practice known as loan flipping. By the time the customer has enough cash to pay off the first, hundreds in interest has accrued.
Patton cited the lack of flexible repayment plans as the legal vise that grips many military customers, tightening with each successive loan. He said that increasing the repayment window to 120 days is one of the most important aspects of AB 1965.
The bill also stipulates that servicemembers can opt out of "binding arbitration," which essentially nullifies the customer's right to file a civil suit against the lender.
Though the Navy budgets millions each year for financial counseling, the task force is committed to reevaluating financial training offered to sailors, understanding the culture of debt and how it has changed for younger generations and partnering with banks and credit unions to provide an alternative sources of loans.
The federal government is also joining the bandwagon by initiating legislation to cap the annual percentage rate on all loans to military at 35 percent. While AB 1965 does not reach that mark on its own, Patton said it's a good step in the right direction.