What is a Military Debt Consolidation Loan?

One would think that serving their country would render service members immune from the debt problems that beset scores of U.S. civilians. Alas, that’s not the case. In fact, scores of military veterans, along with active-duty servicemembers, are dealing with high-interest debt, be it from credit cards or loans. Inflation doesn’t help.

People who carry high-interest debt can often use debt consolidation to make the load easier to handle, but veterans and servicemembers can take advantage of a solution – a military debt consolidation loan – that isn’t an option for non-veterans and civilians. But just what is a military debt consolidation loan? Read on.

Legislation for Veterans

Let’s start here. The Military Lending Act caps the interest rates servicemembers can be charged, which can be a real benefit. Then there’s the equally important Servicemembers Civil Relief Act, which can often shield against repossessions and foreclosures. 

Still, many military members find themselves in need of help with debt.

Military Debt Consolidation Loan

Also known as V consolidation loans, military debt consolidation loans are for veterans and active service members whose homes were bought using VA loans, and who have equity in said homes. If sufficient equity has not been established in the member’s home, or they don’t own a home, they’ll need to try a different solution, perhaps debt settlement with Freedom Debt Relief.

How Do Such Loans Work?

They differ from VA consolidation loans in that a military debt consolidation loan is a type of cash-out refinance. The service member will get a new mortgage for more than what’s owed on the old one. The old mortgage will be paid off and monies leftover can be used to erase high-interest obligations. The lender will extend the mortgage repayment term.  Do note, though, that the amount borrowed can not exceed the home’s appraised value.

Eligibility

In addition to equity in a property, borrowers must show that they have the wherewithal to repay the loan. Lenders will also factor in the servicemember’s credit scores and debt-to-income ratio. Further, veterans must have a VA-issued Certificate of Eligibility.

While the VA guarantees these loans, private lenders make them and may have more eligibility requirements. Veterans’ debt relief can also come in the form of grants, which also is an option worth considering. 

The Benefits of Military Debt Consolidation Loans

• Prepayment is allowed sans penalty, so the borrower can go ahead and pay off the loan early.
• There is no mortgage insurance premium.
• Low credit scores are acceptable.
• Loan terms maybe 15, 20, or 30 years. Note that while longer terms will lower the monthly payment, more interest will be paid in the long run.
• The low-interest loan is great for consolidating high-interest debt, which usually includes credit cards.
• The rate will usually be lower than what civilian loans offer.

The Drawbacks of Military Debt Consolidation Loans

• There will be closing costs plus origination fees, a possible funding fee, and other fees including escrow, appraisal, survey, attorney, discount points, flood certification, and title report and insurance.
• The borrower will experience a drop in equity.
• The borrower is supplanting unsecured debts (credit cards, etc.) with secured debt. The former usually is inadmissible in a bankruptcy filing — if you were considering going that route.
• The borrower’s home secures the loan, which means that if the loan isn’t repaid, and on time, the home could be lost to foreclosure.

So, that’s the skinny on military debt consolidation loans. Size up the particulars against your personal situation – and make the move that’s best for you.

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