Financial literacy is a skill that a lot of people lack and something that members of the military struggle with. A lot of military active-duty members, as well as veterans, deal with insurmountable debt given their privileges as part of the service. Many get fast approval for loans because they are backed by the VA; as a result, many are faced with a great deal of debt by the time they retire or leave the service.
If you are in this same position, you might be curious to know what debt relief options are available. Use this guide to be informed about your options on how to restore your finances and overcome debt.
What is Military Debt Consolidation Loan?
Military debt consolidation loans are highly prevalent, which also indicates how common this problem is among military members and veterans. If you’ve hit a temporary wall when it comes to your finances, there is a way to get around that especially if you have a VA loan on your home.
When you have a VA loan, you are qualified to obtain a military debt consolidation loan (also known as VA consolidation loan). It works like any other types of debt consolidation loan as it is designed to overcome financial difficulties.
When you take this type of loan, you are taking out one big loan to pay off all other existing unsecured debts like your credit card debts, medical bills, and personal loans. Instead of paying for multiple loans per month, you will only have to pay for a single consolidated loan. The premise is that by focusing on a single payment, it would be easier to manage debt payments (whereas paying off multiple debts at once can increase the possibility that you will miss payments on some).
This type of loan falls under the category of “cash out loans”, or that wherein you take out a brand new loan at a higher amount than what you might owe with your existing debts combined. Any difference in the amount will be pocketed by you as cash. As always, you have to pay the closing costs and it will be deducted from the amount of cash that you are supposed to get.
For example, if you have $80,000 worth of VA loan on your home and you apply for a consolidated debt loan of $100,000, you will have $20,000 (minus the closing costs) to take out for this loan. You can use that amount to pay off your existing debts.
The VA will serve as the guarantor when you refinance your home. However, the total amount that you get will depend on the appraised value of your home – and it should not exceed that. There is also a limit to the frequency that you can take out VA loans, so make sure you pay them off first.
One reason to consider getting this type of debt relief is the ability to get a lower interest rate. The closing costs are also considerably lower versus non-military members would normally get for this type of loan (or ones not backed up by the VA). You have the option to choose the repayment term but it can range from as low as 10 years to as much as 30 years.
Benefits of Military Debt Consolidation Loans
Now that you understand how military debt consolidation loans, it is important to examine the benefits that you can get for choosing this method of debt relief.
- You only have to deal with one creditor instead of multiple creditors. If you have ever dealt with debt collecting agencies, you know how much of a headache they can be. By eliminating multiple creditors and focusing on just one, it makes your life less stressful. It also makes the process of paying off debts much simplified. It becomes easier to budget your money on a monthly basis and to allot for debt payments.
- You can get competitive rates on your new loan. This is true if you are a current member of the military. You can leverage that privilege that you have of being backed by the VA to obtain favorable interest rates when you choose to consolidate your debts. In addition, you can also qualify for lower closing costs than most civilians.
- You can pay less with this type of loan. Given that you can lower the closing cost and the interest rate, the total amount that you owe will be significantly lower. That money that you would have otherwise spent on the interest rate and closing costs can be used towards building your emergency fund.
- Use this as an opportunity to rebuild your credit score. When you pay off your debts on time and by lowering your debt-to-income ratio, you can boost your credit score. The ability to maintain a healthy credit score is something that a lot of military service members struggle with. You can exploit this opportunity to build a strong foundation for your finances.
Who Qualifies for Military Debt Consolidation Loans?
The main eligibility criterion for military debt consolidation loan is that you have to be an active member of the military service – or a retired one. There might be additional requirements depending on the lender, although that is essentially the main one.
It works like a standard loan with the main difference being the purpose of the loan will go towards funding your debt payment in full. As with any other types of loans, there are existing fees such as late fees, interest rates, and other charges that will be made known to you upon the approval of the loan.
Tips for Military and Veterans Obtaining Debt
If you are a member of the military – whether active or a veteran – dealing with debt is a common issue that you face. You are not alone in this. There are many veterans who are faced with an astounding amount of debt. If you find yourself overwhelmed with the amount of debt that you need to pay off, there are steps you can take to manage your debt successfully.
Here are some of the tips that you need to know for a successful debt management and to be on your way to debt relief.
- Make sure to keep an eye on your credit score. Members of the military often have privileges when applying for credit due to their affiliations with the military. However, when you retire or when you are out of service, you will come to realize the value of maintaining a good credit score. It is the single biggest factor that can impact your interest rate and the ability to get a loan. Don’t wait until you retire before you do something about your credit score. You can leverage your debt consolidation efforts if you have a good credit standing so you can obtain the best rates.
- Keep a close tab on your credit card debt. One of the perks that military members get to enjoy is with the help of the Service Members Civil Relief Act. But when you leave active duty, you lose this privilege. As a result, you can get standard rates. If you have poor credit score and a hefty amount of credit card debt, you can expect rates in a double-digit range. Make sure you do not ignore your credit card bills, or pay them late, as you could end up in serious debt trouble. Consider consolidating them or looking for debt relief alternatives.
- Be smart about which loans to go for. Not all loans (and loan providers) are made equal. If you are desperate for debt relief, it is easy to be lured by offers for fast loan approvals, such as payday loans. There are a lot of military members (active or veterans) that use this type of service to get quick cash. However, this can come with serious circumstances because interest rates can go as high as 36%. This can make these loans difficult to pay back or put you in more debt trouble. Make sure to consider other options before you resort to this type of loan.
- Check the VA for debt consolidation options. You can reach out directly to the VA if you want to consider debt relief programs. You can take out one big loan to pay off all of your existing debts making it easier to manage the payment of a single loan. It is important to note that the VA won’t be able to offer this loan option directly; however, they can provide you with home refinancing. This is a major financial decision so always consult an expert before you make this move.
- Seek out financial counseling. There are financial experts out there that can provide you with the counseling you need so you can address any issues with your finances. This is an important step if you are serious about making improvements to your financial situation.
Other Debt Relief Options for Military Veterans
Are you looking for other ways to get debt relief as a military member or veteran? There are a few options for you to consider.
Debt relief programs for veterans are one option that you might want to consider. The government provides various programs aimed at providing assistance to former and active service members. Therefore, you can look into it when you want to get debt relief. For example, there are programs that forgive student loans for those who suffered a disability as a result of their time in service. There might be other assistance programs for other types of debts, so make sure to look into that.
Debt consolidation through private lenders is another option you can try. It works the same way as military debt consolidation loan but without the backing of the VA. You can get the same benefits as MDCL but without the lower interest rates. Private lenders could charge steep interest rates unless you have a good credit score. Therefore, consider this option only if you have a good credit standing.
Debt cancellation is another option for debt relief although it is designed primarily for credit card debt. There are two options for this to happen: you can file a bankruptcy (which will remain in your credit report for a minimum of 7 years) or you can settle your debt for less than what you owe.
Credit counseling is another option for those individuals who are dealing with credit card debt. You will be working with a certified credit counselor who will evaluate your debt and recommend the best debt relief method to pursue. Some of the options that you might be pursuing are debt settlement, debt consolidation, and debt management.
You can also try credit monitoring if you are dealing with a seemingly insurmountable amount of debt. It requires the use of tools that will enable you to monitor any changes or updates in your credit status. Whenever there are changes to your credit information, you will be notified immediately. This is a great way to overcome debt due to identity theft. This is an important tool when you are serious about fixing your credit.
The Bottom Line
You don’t always realize how much debt you are dealing with until you are faced with the insurmountable challenge of paying them off. If you are a military service member or veteran, you can take relief in the knowledge that you have a few options available to fix your credit. Learn more about the options listed above on how you can get debt relief so that you can slowly work your way out of debt and into a healthier financial future.