Pre-service debt: Your interest rate might be lower than you think
July 29, 2011
FORT BRAGG, N.C. - Exercising your rights under the Servicemembers Civil Relief Act provides a quick way to strengthen your financial footing.
All it takes is a short letter to reduce the interest rate on your loans down to 6 percent. Indeed, the SCRA places a 6 percent interest rate cap on pre-service loans (other than student loans), which can save you thousands of dollars.
For example, if you finance a $20,000 car at 12 percent interest for five years, the interest rate limitation can save you $3,500. Applying the rate to your mortgage can save you tens of thousands of dollars in the long run.
The 6 percent interest rate limitation does not apply to every loan. Instead, it applies only to those loans a Soldier incurred prior to entering active duty. For most loans, any interest over 6 percent is forgiven for as long as the Soldier remains on active duty. For mortgages and similar loans secured by real estate, the limitation survives for one year after leaving active duty.
It is important to note that the interest is not tolled or waiting for you once you leave service. Your lender is obligated to forgive the excess amount. In addition, if your lender violates the 6 percent mandate, Congress has authorized stiff punishments, including fines, imprisonment, or both.
The interest rate cap is not automatic. You must provide written notice of your active-duty status to your lender along with a copy of the orders evidencing your entry onto active duty. The SCRA even provides retroactive protection. If you provide written notice to your lender within 180 days of leaving active duty, your lender must forgive any interest above 6 percent you incurred while serving on active duty.
The SCRA does provide the creditor some recourse. If your ability to pay an interest rate above 6 percent is “not materially affected” by reason of your service obligation, the creditor can seek a waiver of the limitation. Fortunately for the Soldier, such a waiver requires court approval. Few creditors want to incur the legal expenses necessary to seek court approval of the higher rate.
The SCRA provides a number of other financial and legal protections for Soldiers, including, limitations on repossession, foreclosure, and civil suits. If you have any questions regarding the SCRA, or if you would like an example letter asking your lender for the reduced interest rate, the legal assistance office stands ready to help.