updated 9/29/2006 9:39:39 PM ET 2006-09-30T01:39:39

Interest rates on payday loans to military service members would be limited under an agreement reached Friday by House and Senate Republicans.

The measure imposing a 36 percent cap on the annual interest rate for payday loans to service members or their spouses will be included in the defense authorization bill. The House passed the authorization bill Friday, but it stalled in the Senate.

“We need to enact these new protections for our troops and their families because a growing predatory lending problem has impacted our operational readiness,” said Sen. Jim Talent, R-Mo., who pushed the measure in the Senate.

Talent and other lawmakers charged that payday lenders target military personnel, offering quick cash advances at outrageously high interest rates that trap unsavvy borrowers in a cycle of debt.

Payday lenders offer short-term loans against borrowers’ paychecks and charge fees. Borrowers who cannot repay the loan by the next payday often “roll over” the loan repeatedly, leading to more charges.

The average annual percentage rate for payday loans is about 390 percent. As lending fees pile up, borrowers can end up paying an annual percentage rate of 800 percent or more.

The Defense Department strongly supported the rate cap measure after issuing a report earlier this year finding many payday lenders are clustered around military bases.

Industry officials say payday loans provide financial assistance to soldiers in need and claim military personnel will be forced to seek high-cost loans from unregulated Internet lenders.

“We are extremely disappointed that the conferees have chosen to take away valuable financial choices from service members,” said Darrin Andersen, president of Community Financial Services Association of America, which represents more than half of the estimated 22,000 payday industry outlets.

Andersen said military personnel make up only 1.3 percent of revenue across the industry.

Pentagon officials said the problem was becoming an issue of military readiness, with spiraling debt causing service members to lose security clearances or become distracted from their missions.

Consumer protection advocates, who have long criticized payday lenders for preying on poor communities, also backed the measure.

“It’s important for this to be in federal law because it will provide a base line of protection regardless of where you’re stationed and regardless of what form of loan you’re getting,” said Jean Ann Fox, director of consumer protection for Consumer Federation of America.

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