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What Allotment Loans Mean for Government Employees
Allotment loans provide an option for federal government employees who have bad credit to get a loan with favorable terms. There are two types of allotment loans, and they are generally easy for government employees to apply for. Unfortunately, allotment loans are often used by unscrupulous lenders to ensnare low-income government employees, particularly active service military personnel. The Military Lending Act was created to help protect active service members from being taken advantage of by predatory lenders.
What is the Military Lending Act?
The Military Lending Act (MLA) is a Federal law which provides special provisions and protections for active-duty service members and their spouses and covered dependents. The rights under the MLA include:
- An interest cap: Those covered by the MLA cannot be charged an interest rate greater than the 36% Military Annual Percentage Rate (MAPR). When the interest rate is calculated it must include the following costs:
- Finance charges
- Credit insurance fees or premiums
- Add-on products related to credit
- Participation or application fees
- No mandatory waivers: A creditor must not ask you to waive consumer protection laws such as the Servicemembers Civil Relief Act.
- No mandatory allotments: A creditor must not make creating a voluntary military allotment a condition of getting the loan.
- No prepayment penalty: A creditor must not charge a penalty when a borrower pays back all or some of the loan early.
In 2015, the Department of Defense expanded these rules to cover all types of credit covered by the MLA. Consumer credit products covered for active service members include:
- Payday loans
- Overdraft lines of credit but not traditional overdraft service
- Installment loans
- Certain student loans
- Credit cards (since October 3, 2017)
Although allotment loans were prohibited for enlisted service members, they are still available for other government employees.
What to Know About Allotment Loans for Federal Employees
There are two types of allotment loans which are available to federal employees. These are:
- Discretionary allotment loans: This type of allotment loan is one in which the borrower can designate a certain amount of money to be taken automatically from the borrower’s paycheck. They are typically allowed for any purpose, such as paying monthly bills. A discretionary allotment loan can begin and end at any time.
- Non-discretionary loans: This type of allotment loan is similar to the discretionary loan in that you can have a certain amount of your paycheck designated to the purpose of the borrower’s choice, except in this case, the allotment can not begin and end at any time.
These allotment loans are planned between the borrower and the lender. This type of loan is easy for Federal government employees to qualify for, even in cases where they have a poor credit record. This is because repayment is guaranteed so long as the borrower is employed by the Federal government. To facilitate repayment, allotment payments are divided between the borrower’s paychecks.
Allotment loans for government employees may have some advantages. These include:
- Small loan amounts: Allotment loans can cover whatever small amount an employee needs. This can be anywhere from a few hundred dollars to a few thousand.
- Easy to qualify: More than 43 million Americans have a credit score lower than 599, which is considered a bad credit score. A low credit score can make it very difficult for people to obtain traditional loans. Allotment loans can allow government employees with poor credit scores access to the money they need.
- Fast approval: When government employees need money fast, such as for a car repair or medical emergency, they don’t have time to wait around for a lender’s approval. Government employee allotment loans have a fast approval process. Typically, an employee can qualify for a loan in just a matter of minutes.
- Simple requirements: Installment loans do not require employees to fill out a lot of paperwork or provide a lot of documentation. Providing the employee is 18 years or over, a U.S. citizen and has a valid bank account he or she is good to go.
- Short payment plan: Government employees who take out an installment loan do not have to worry that they will have to take years to pay back the loan. Installment loans typically have a short payment plan which enables borrowers to see the duration of payments when they first sign up, so the end is always in sight.
- Spending freedom: When government employees apply for an installment loan, they do not have to explain what the money is for. This means the loans do not have to be spent on specific things. It also allows borrowers to know that their loan is completely confidential.
- Useful for emergencies: When unexpected expenses crop up, government employees can use an installment loan to carry them through, even though they have no safety net in the bank.
- Reliable interest rates: Because allotment loans have fixed interest rates for the term of their life, this means that the borrower has no need to worry about the rate being hiked up before he or she has repaid the loan. Borrowers know exactly what to expect each pay period. This means employees feel completely in control of their budget.
Disadvantages of Allotment Loans
While allotment loans have many advantages for government employees, there are some disadvantages that employers need to be aware of. These include:
- If an employee quits or is fired from a federal job, they are still required to repay the loan. The lender will also have to be notified of the change in position.
- In circumstances where an employee is able to take out multiple allotment loans at the same time, the employee may get stuck in a cycle of debt.
- Some larger corporations that work directly with employees rather than going through employers or HR departments just continue to take as much as they can from employee paychecks.
- Employees who are already in debt may not benefit from an allotment loan because it merely increases their debt burden.
- The lack of restrictions on how much is borrowed from a paycheck can also be disadvantages for employees who are already in debt.
Offering installment loans to your employees can be a great benefit to their overall financial wellness, particularly if they are going through a financial crisis because of a sudden family or personal emergency. One of the main benefits of an installment loan for government employees is that the loan does not have to be paid back in full, from the next paycheck, as a payday loan does. This means employees can borrow more without feeling under pressure to pay back the loan in a short amount of time.
TrueConnect: An Alternative to Allotment Loans
TrueConnect is aware of the need for a responsible lending approach for federal government employees. It’s also important that employees have a better understanding of their loan options and help with making financial decisions in the future. This can help them avoid predatory lenders.
TrueConnect is partnering with cities, counties, schools and other government employers to offer an alternate solution to traditional allotment loans. Because TrueConnect’s employee loan programs are offered by employers as a benefit, employees are protected against the hazards of taking loans from predatory lenders. Employees won’t borrow more money than they can pay back, the terms of the loan are fair, employees can receive financial counseling, and their repayments are reported to credit agencies, which can help them improve their credit scores. TrueConnect can help ensure that your employees feel confident that they are getting the help they need to pay their debt.