The Complete Guide to Military Debt Consolidation Loans

Americans have a debt problem, and service members are not immune. Many veterans and active-duty service members carry high-interest debt from credit cards and short-term loans. In 2017, 44% of all military service members used a payday loan at least once. Debt consolidation is an option for many people who owe high-interest debt, but military debt consolidation loans offer veterans and service members an option that isn’t available to civilians and non-veterans.

Service members enjoy financial protections that civilians don’t. The Military Lending Act limits the interest rates that lenders can charge you and the Servicemembers Civil Relief Act protects against many foreclosures and repossessions. Understanding the options available to you as a service member makes financial management easier. Military debt consolidation loans are one of those options.

If you’re an active duty service member in serious financial stress, get help. Command financial specialists are there to help you and many units offer Family Support Centers that can give private advice. On-base banks and credit unions offer many options. There’s nothing wrong with admitting that you have a problem and looking for help with solving it!

What Is a Military Debt Consolidation Loan?

Military debt consolidation loans are also known as VA consolidation loans. They are available to active service members and veterans who own homes that were purchased with VA loans and have equity in those homes. If you don’t own a home or have not yet built up equity in your home you will have to use a different method of debt relief.

A VA consolidation loan is secured by your home, which means it will usually have a lower interest rate. You’ll take out a single loan, use it to pay off your existing debts, and then pay off the new loan with a single convenient monthly payment.

A military debt consolidation loan is a form of cash-out refinance. You will take out a new mortgage for more than you still owe on your old mortgage. You’ll pay off your old mortgage and use the balance of the loan to pay off your old high-interest debts. You will not be able to borrow more than the appraised value of your home.

If the appraised value of your home is $250,000 and the remaining balance on your mortgage is $150,000, you have $100,000 in equity in your home. You could get a new military debt consolidation loan for $200,000, pay off your old mortgage, and you’d have $50,000 left (minus closing costs) for debt consolidation. Your mortgage repayment term will be extended.

Equity is based on the current appraised value of your home, not on the amount you paid for it. Home values have risen steeply in many areas in the last few years, so many homeowners have more equity than they realize.

A military debt consolidation loan will only help you if you can control your use of credit. If you keep racking up credit card debt you’ll be paying off the debt consolidation loan and the new debts as well, and you won’t be any better off.

How Do I Qualify For a Military Debt Consolidation Loan?

You will have to meet several requirements to qualify for a military debt consolidation loan.

  • You must own a property with equity.
  • If you’re a veteran you will need a Certificate of Eligibility from the VA.
  • You will need to demonstrate that you have the ability to pay the loan back. Your credit history and debt-to-income ratio (DTI) will be key factors in this calculation.
  • These loans are guaranteed by the VA but made by private lenders. Some lenders have additional requirements.

Pros

  • Your interest rate and closing costs will usually be lower than those of civilian loans.
  • The low interest rate makes these loans ideal for consolidating credit card debt and other high-interest loans.
  • You can select a 15, 20, or 30 year loan term. Longer terms mean lower monthly payments but higher total interest costs.
  • Loans are available with relatively low credit scores.
  • You will not pay a mortgage insurance premium.
  • There are no prepayment penalties, so you can pay your loan off early or refinance again.

Cons

  • Your home is collateral for the loan, so if you can’t pay the loan you could lose your home to foreclosure.
  • You are replacing unsecured debts (which can be discharged in bankruptcy) with secured debts (generally not dischargable in bankruptcy). If you are in serious debt trouble and considering bankruptcy this could be a bad move.
  • Your home equity will be reduced.
  • You will pay closing costs.

Closing Costs on Military Debt Consolidation Loans

VA regulations limit closing costs on VA-guaranteed loans, but you will still face some costs. Be sure to compare offers from different lenders to get the lowest fees.

Origination Fees

VA lenders can charge an origination fee of up to 1% of the loan’s value. The origination fee covers the cost of processing the loan. Some lenders will charge the full 1%, others may charge less. Some lenders may not charge an origination fee.

If your lender charges an origination fee, they should not charge underwriting or processing fees, mortgage broker fees, escrow fees, or other fees for loan processing services. These should be included in the origination fee.

VA Funding Fee

The VA imposes a funding fee to cover the cost of VA loans to the government. You may be exempt from the funding fee under some conditions.

  • If you are receiving or are eligible for compensation for a service-related disability.
  • If you are the surviving spouse of a veteran who died in service or from a service-related disability and you’re receiving Dependency and Indemnity Compensation.
  • A service member with a proposed or memorandum rating, prior to the loan closing date, stating that you are eligible due to a pre-discharge claim.
  • You have received the Purple Heart.
  • Unlike the funding fee for first time VA mortgages, the funding fee for a military debt consolidation loan is not based on the amount of the down payment. Your funding fee will be 2.3% of the loan amount. Any subsequent loan will have a fee of 3.6%. This fee can be rolled into the loan amount or paid up front.

Other Fees You May Have to Pay

There are a number of other fees that could be included in your closing costs.

  • Appraisal
  • Credit report
  • Discount points
  • Title Report and Title Insurance
  • Real estate broker’s commission
  • Recording fee
  • Escrow (taxes, insurance)
  • Flood certification
  • Survey fee
  • Attorney’s fees

Some lenders may roll these fees into the origination fees, others may charge them separately.

Other Military Debt Relief Options

Military debt consolidation loans serve a relatively limited number of people. If you don’t own a home or if you have yet to accumulate equity in your home you will need to look at other options to consolidate debt.

The Servicemembers Civil Relief Act

The Servicemembers Civil Relief Act contains a broad range of protections for active-duty military service members. Creditors will have to lower interest rates on pre-service obligations, including credit cards and loans, to 6% if you can show that your ability to pay has been materially affected by your service.

You will also be protected from eviction, repossession, and foreclosure in some circumstances.

You will usually have to apply for these benefits. Some credit card issuers will automatically extend them. If you can reduce the interest rates on some of your obligations you may not need to consolidate them.

Want to know more about the Servicemembers Civil Relief Act? Watch this video:

Debt Settlement

If you are deep in debt and facing the possibility of bankruptcy, debt settlement is a possible way out. A debt settlement company will negotiate with your creditors and try to get them to reduce the total amount you owe. This may involve stopping payment to some creditors and paying into escrow accounts while the company negotiates.

Debt settlement can be risky: your accounts may be reported as delinquent and even if settlement is accepted your debts will be reported as settled for less than the original amount. This will harm your credit.

Balance Transfer Credit Cards

If you are carrying high-interest credit card debt you can consider consolidating debt with a balance transfer card instead of a military debt consolidation loan. Many of these cards have extended zero-interest periods. You can transfer your balances to the new card and pay it off with no interest.

You will need good credit to get approved for these cards, and you’ll have to pay the debts off before the zero-interest period is up, or you’ll be back to paying high interest rates.

Many credit card issuers offer special deals to active duty service members, including fee waivers and lower interest rates on some balances. Inquire with your card issuer. It’s also worth looking into balance transfer cards issued by military credit unions like the Pentagon Federal Credit Union (PenFed), Navy Federal Credit Union, and Air Force Federal Credit Union.

Always check several offers before choosing a balance transfer card. Terms can vary widely.

Personal Loans

Financial institutions and credit unions offer a limited selection of personal loans. Some credit unions offer installment loans that cater specifically to armed forces members and veterans and include some extra perks. Other banks and online lenders will offer fixed rates and terms that might be better than some other loan options but don’t require you to be active-duty military or a veteran to apply. These loans have the flexibility to allow you to consolidate multiple types of debt, and some are available even if you have bad credit.

These lenders include USAA, PenFed, SoFi, Navy Federal Credit Union and Air Force Federal Credit Union.

Debt Management Programs

If you are having serious difficulties with credit card debt or other unsecured debts (like medical debt or payday loans) it is worth talking to a credit counselor. Credit counseling is offered by nonprofit credit counseling agencies. Most will offer a valuable initial session for free. Most also offer debt management programs.

If you enter a debt management program you will make a single monthly payment to the counseling agency, and they will pay your creditors. The agency will also negotiate for better terms. You may have to close some credit accounts and you may not be able to open new ones, and you will pay a setup fee and a monthly fee.

A debt management plan can be a very effective way to get out of debt, but it will take three to five years, and you will need discipline and commitment to complete the plan.

Special Forbearance or Hardship Programs

If you’re struggling with debt payments, talk to your lenders. Many lenders have deferment or forbearance programs. If you’re paying a mortgage or federal student loans, there are a wide variety of programs that can provide temporary relief. You will still have to pay the debt and interest may accumulate, but lenders are often willing to work with you to get you past a difficult spot.

Many credit card issuers offer hardship programs that can help borrowers, especially those who are having difficulty due to circumstances beyond their control, like medical bills or divorce. These programs are often not advertised, so you’ll have to ask your issuer.

Mortgage Assistance

You cannot include a mortgage in a debt consolidation or a debt management plan. Consolidating other debts can make it easier to keep up with mortgage payments. There are also specific plans to assist service members and veterans with mortgage difficulties that range from refinancing to mortgage modification.

  • VA loan repayment plans provide a new payment schedule that adds missed payments to scheduled payments.
  • VA Home Loan Special Forbearance gives you an opportunity to make up missed payments.
  • VA Loan Modification usually involves adjusting your loan term to reduce your monthly payments. This may increase your total interest cost.
  • Foreclosure postponement involves a delay in foreclosure so you can sell the house and pay the mortgage.
  • Short Sale involves selling the home for less than the remaining balance on the mortgage, with the lender accepting the sale price as payment. This usually happens when you owe more than the home is worth. Your credit will be affected.
  • Deed in lieu of foreclosure involves signing the deed over to the lender voluntairily as an alternative to foreclosure.

The VA has a web page providing detailed information on assistance for veterans facing foreclosure. Active duty service members enjoy substantial protection from foreclosure under the Servicemembers Civil Relief Act.

Payday Loan Usage Is Up Among Active Duty Service Members

Many members of the military are under financial stress, and a recent survey indicates that the COVID-19 pandemic has made that stress worse.

  • 78% of active-duty service members took out a loan during the pandemic.
  • 52% reported that it was hard to find suitable loan options during the pandemic.
  • 51% of military spouses said they were very worried about a potential loss of income and job security.
  • 51% of active duty service members and 38% of spouses reported looking for extra income from the gig economy.
  • 31% of active duty servicemembers took out a cash advance or payday loan in 2020, iup from 13% in 2019.
  • 49% of veterans wish they had more information about financial resources for veterans, and 50% believe that there should be more financial resourcers for veterans.

The Military Lending Act caps interest rates for active-duty service members and their spouses at 36%. Payday lenders cannot ask you to waive rights or submit to arbitration. They cannot demand a voluntary allotment from your salary to pay your loan or impose a prepayment penalty.

These protections are valuable, but they can also be tempting. A 36% interest rate is a lot lower than the rate on civilian payday loans, but it’s still a high-interest loan and it can still get you into debt trouble. Debt consolidation is a viable option if you’re carrying these high-interest loans.

Other Financial Resources for Veterans

A number of other private and government organizations provide help for financially stressed veterans.

VFW Unmet Needs Program

The Veterans of Foreign Wars (VFW), a private organization, offers the Unmet Needs Program, which provides outright grants of up to $2500 to help service members, veterans, and their families with their basic needs. The program serves people in three specific hardship situations.

  • Active duty personnel facing hardship from a pay error, a current deployment, or a medical discharge.
  • Veterans discharged after 9/11/2001 with hardship related to service-connected injury or illness.
  • Veterans discharged before 9/11/2001 who are on a fixed income that includes VA compensation who face unexpected hardships.

Financial issues stemming from separation, divorce, financial mismanagement, or bankruptcy do not qualify for relief.

National Resources Directory

The National Resources Directory or NRD contains a verified list of programs supporting veterans, service members, families, and caregivers. Both private and public resources are included, making this a great one-stop search point for assistance programs that are relevant to your needs.

You can search a database of over 16,000 programs, starting with general categories like health, housing, employment and many others, and narrowing your search down until you find the services you need.

Veterans Benefits Administration

The Veterans Benefits Administration website is a direct portal to all federal government programs supporting veterans. You can search for programs serving your specific needs, ask questions, subscribe to a newsletter, or call a toll-free Veterans Crisis Line.

Many veterans don’t get the help that they are entitled to, simply because they don’t know it’s there. If you need assistance, search for it. If you don’t find it, ask. You earned these benefits: they are part of what the nation owes you for your service. Don’t hesitate to use them!

Department of Defense Resources

The U.S. Department of Defense offers a resource website linking to programs for active duty service members, veterans, and their families. This is designed to help you navigate the complex bureaucracy surrounding federal benefits and take advantage of the services you need.

If you’re on active duty, your unit will offer Command Financial Specialists and Family Support Centers who have the knowledge to link you to appropriate programs and provide counseling and advice.

The U.S. Department of Veterans Affairs has a helpful list of options and nonprofit organizations for military veterans and their family members who are facing immediate financial difficulties and need help paying bills, food assistance, loans or rental assistance.

Auto Loan Programs for Veterans

The Veterans Administration does not guarantee or provide car loans. Some private lenders, car dealers or car manufacturers may offer special deals for veterans or active duty service members, but be sure to check the details, compare to other offers, and be sure you’re really getting the best deal. Some promotions for veterans are limited to 12 or 24 months after leaving service.

Military-specific credit unions like the Pentagon Federal Credit Union (PenFed), Navy Federal Credit Union, and Air Force Federal Credit Union can get great sources of car loans at advantageous terms.

The Bottom Line

If you’re having trouble paying debts, take action. There are options available to you. Military debt consolidation loans are among those options, and if you don’t qualify there are other steps that can help you. The worst thing you can do is nothing. If you have a debt problem, it’s best to admit it and look for help.

You will see many online loans advertised as “military loans.” Many of these are offered by private lenders and may not have the best terms you can get. If you’re looking for a debt consolidation loan — or any other loan — always read the terms in detail and compare several loan offers!

FAQs

What is a Military Star Card?

The Military Star Card is a private-label line of credit offered by the Exchange Credit Service and managed by The Army and Air Force Exchange Services. The ECP operates the program on behalf of the Army, Air Force, Navy, Marines Corps and the Coast Guard. Card benefits lower interest rates than average and 0% financing on some purchases. You won’t be penalized if you have less-than-stellar credit. The drawback is that the card can only be used to shop online and brick-and-mortar military exchanges. The Exchange Credit Program uses a portion of the revenue from the Star Card program to fund Morale, Welfare and Recreation Programs for active-duty service members and their families.

Do You Have to Pay Student Loans While On Active Military Duty?

Military service does not usually exempt you from student loan payments, but there are several programs that can assist you. Some individuals in critical occupational specialties, including many health-related professions, may qualify to have all or most of their loans paid. Military Service Deferment may allow you to postpone or defer payments during certain periods of active duty, such as wartime service or service away from your normal post. Interest will not accumulate on loans during deployment in hostile areas. These and other military student loan benefits usually apply only to federal student loans.

How Much Do Military Wives Get Paid?

There is no stipend or direct payment for spouses of service members. Service members can elect to have a portion of their salary paid to their spouses, but this is a part of the existing salary, not an additional benefit. Military families do have access to substantial benefits: free healthcare, childcare in many cases, housing allowances, access to low-cost on-base shopping, recreational opportunities, and more.

Can the Military Garnish Wages?

Basic pay, special pay, and incentive pay can be garnished for alimony or child support. Housing and subsistence allowances cannot be garnished. Garnishment requires a court order unless the debt is owed to the federal government. Military pay cannot be garnished for commercial debt, but a debtor can apply for an involuntary allotment, which achieves the same person. Total garnishment cannot exceed 25% of pay, so a service member paying 25% of their pay in alimony or child support cannot be subject to an involuntary allotment.

How Do I Know If I Have Out-of-Service Debt?

Out-of-Service Debt is debt owed to the military by former service members. You can check for Out-of-Service-Debt using the Defense Finance and Accounting Department’s debt payment status tool.