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    Debt Consolidation Options for Veterans

    It is an unfortunate reality that ex-service members have a more difficult time making their bill payments than those of the civilian population.

    Those struggling with bill payments often look to debt consolidation in an effort to make their debt load more manageable. 

    Fortunately, unique loan options, such as VA home loans, SBA business loans, and more are available to them through the Department of Veterans Affairs.

    What Is A Military Debt Consolidation Loan?

    One of the most commonly reported issues veterans face is debt management. Due to this reality, certain options, such as the Military Debt Consolidation Loan (MDCL), have been made available to veterans exclusively.

    MDCLs are consolidation loans backed by the government but are not issued by the VA. The VA simply adds certain stipulations, such as a cap on closing rates, fees, and interest rates on the loan.

    An MDCL is a type of home equity loan and is only available to those who have a mortgage through the VA.

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    Who Is Eligible for Military Debt Consolidation Loans?

    Qualifying for a military debt consolidation loan is simple. One must be a veteran and also have a mortgage through the VA. 

    Title 38 of the Code of Federal Regulations defines a veteran as “a person who served in the active military, naval, or air service and who was discharged or released under conditions other than dishonorable.” 

    Those who served in a part-time or reservist role may also be eligible for an MDCL if they have enough active duty time to their credit.

    What Types Of Debt Can Be Consolidated?

    When borrowers discuss debt consolidation they are usually referring to their unsecured debts. Unsecured debt is any debt in where no collateral was used to guarantee the loan.

    This is in contrast to secured debt, in which an asset of some kind is used as collateral.

    Examples of secured debt include a home mortgage and vehicle loan.

    Unsecured debt usually comes with a higher interest rate because they are riskier for the lender. Should the borrower fail to make their payments there is no asset the lender can take possession of to recuperate their losses. 

    These higher interest rates are what make unsecured debt a good candidate for debt consolidation.

    Examples of unsecured debt include credit cards, gas cards, medical bills, backed rent, and payday loans.

    What Are The Benefits Of Military Debt Consolidation Loans?

    As previously stated, the MDCLs are not granted by the VA but by private lending institutions such as banks, credit unions, and savings and loan institutions.

    Accordingly, veterans still have to qualify for the loan, but there are several benefits available to veterans through a Military Debt Consolidation Loan. 

    • Lower debt-to-income (DTI) ratio and credit score required to qualify
    • Repayment terms of up to 30 years
    • Active duty members may receive foreclosure protection
    • No prepayment penalties are associated with early payment
    • MDCLs often carry slightly lower interest rates than non-VA backed loans
    • Up to 100% LTV Ratio loans are available without having to pay private mortgage insurance
    • Lower monthly payments due to lowered interest rates and increased term options
    • Access to a revolving line of credit, meaning money can be drawn from the LOC as needed

    What Are The Drawbacks of Military Debt Consolidation Loans?

    MDCLs can help veterans regain control over their debts. Debt becomes easier to manage because it allows them to consolidate their outstanding unsecured loans into smaller monthly payments with a lower interest rate.

    Still, there are also some drawbacks to MDCLs.

    • Veterans are not active duty members and therefore do not have access to foreclosure protection. They stand the chance of losing their home should they fail to repay their debt.
    • The closing costs associated with MDCL can be quite high, ranging between $1,200 to $6,000.
    • Market conditions could result in an ‘Underwater Mortgage’. This occurs when a home’s value drops below the price of the original mortgage. An underwater mortgage situation is always a risk concerning home equity loans.
    • Consolidation loans do not protect against poor spending habits. Even if the debt is consolidated, access to revolving credit may cause poor debt management habits to resurface, leaving the individual in more debt than before.

    5 Programs Designed To Help Active Duty Soldiers And Veterans

    As previously mentioned, many veterans and active-duty soldiers suffer from financial difficulties and require debt relief assistance. Luckily, some programs exist that offer just that. Below are 5 of the most important programs.

    1. Servicemembers Civil Relief Act: This piece of legislation offers certain legal and financial protections to active duty servicemen, reservists, and National Guardsmen. The SCRA requires creditors to reduce the interest rate of all debts incurred before active duty to 6%. It also stops any eviction efforts against the servicemember's family and main residence as well as the postponing of foreclosure.

    2. Military Lending Act: The MLA, enacted in 2006, protects an active-duty servicemember and any dependents from predatory lenders looking to take advantage of the steady supply of income offered by the US Military. The MLA caps all interest rate charges at a max of 36% and has other measures that protect active duty members from specific, predatory loans such as high-interest payday loans. This protection extends to nearly all types of unsecured debt but does not apply to mortgages or car loans.

    3. Veteran’s Housing Benefit Program: This program is focused on offering housing solutions to Veterans, offering them a bed in a facility for up to 24 months. While this may be the main focus of this program it also offers loans to veterans at very low-interest rates.

    4. Nonprofit Credit Counseling: A debt management professional can help individuals go over their debt and determine the type of debt management solutions are available to them. Unfortunately, quality counseling can be costly. For this reason, the VA has made nonprofit credit counseling available to veterans. Debt management solutions can be examined and veterans can be informed about what programs are available to them.

    5. Military Debt Consolidation Loan: Veterans have access to consolidation loans that offer rates, caps, and term lengths that are more favorable than they would receive in the civilian market.

    What Types of Debt Relief Alternatives Are Available for Veterans? 

    Using one’s home as collateral should not be a borrower’s first debt reduction strategy. An MDCL can be risky for those whose financial future is uncertain given any minor change in one's financial situation could result in them losing their house. Due to this reality, other strategies should be pursued first.

    Debt Counseling: Through the VA, veterans have access to nonprofit debt counseling services. The veteran will sit down with a debt specialist and review what debt relief options they have.

    Debt Settlement: Debt Settlement is an arbitration process in which the creditor agrees to accept an amount less than the outstanding balance on debt as full payment. Most people go to a for-profit debt management business to help them negotiate a settlement. The for-profit nature of the business presents a conflict of interest and borrowers do not always get the relief they desire. Through the VA, veterans have access to nonprofit debt management services that can often get more favorable terms for their clients.

    Bankruptcy: Chapter 7 and 13 bankruptcy is always an option for those whose debt situation is so poor that they have no realistic way of paying it off, even with debt consolidation and settlement. 

    Conclusion

    MDCLs are viable debt reduction options available to veterans who have a mortgage through the VA. These loans offer more favorable interest rates and terms than standard consolidation loans.

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