The auto lending and the SCRA landscape in the United States is characterized by many millions of borrowers, with almost 44 percent of Americans taking out auto loans. The additional fact that interest rates are higher for used cars, long-term loans, and those with low credit scores adds to the complexity. This creates a challenging situation that can worsen over time should payments be missed or default occurs.
The magnitude of the auto lending problem can be gauged by the fact that according to a February 2019 article by the Washington Post, there are 7 million Americans who are at least 3 months behind on their car payments across the country. Fortunately, auto lenders may work with military servicemembers under certain circumstances, as outlined in the Servicemembers Civil Relief Act (SCRA).
The Servicemembers Civil Relief Act (SCRA) provides important financial and legal protections for active duty service members. Two of the most significant protections offered by the SCRA relate to auto loans – capping interest rates and preventing repossession. Understanding exactly how these protections work is critical for service members looking to buy a car or struggling to make payments on an existing auto loan.
Interest Rate Cap
One of the most valuable benefits of the SCRA is that it limits interest rates on debt incurred prior to entering active duty to 6%. This includes credit cards, mortgages, student loans, and also auto loans.
For example, if you took out a car loan with an 8% interest rate prior to entering active duty, the SCRA requires the lender to reduce the rate to 6% once you enter active duty status. They must honor this reduced rate throughout your active duty service
The interest rate cap even applies for one year after completion of active duty service for mortgages. However for auto loans the reduced rate ends when you complete your active duty commitment.
This interest rate cap provides significant savings on financing costs for the vehicle over the life of the loan. For service members with existing auto loans prior to active duty, it’s essential to notify lenders of active duty status to receive the reduced interest rate.
Repossion Protection
The SCRA also prevents creditors and lenders from repossessing vehicles without a court order for non-payment related to auto loans that existed prior to active duty status.
This protection means the lender cannot simply repossess the vehicle for missing payments. They must first obtain a court order approving the repossession.
To receive court approval, the lender must show that your ability to make the required payments has not been materially affected by your military service. If the court determines your ability to pay has been impacted, they may delay the repossession proceedings or adjust the payment obligations.
This repossion protection gives service members critical time to get financial affairs in order without immediately losing personal transportation. It applies during all active duty periods and for one year after completing service.
Who is Eligible?
The interest rate cap and repossion protections apply to active duty members of the Army, Navy, Air Force, Marine Corps, Coast Guard, Public Health Service, and National Oceanic and Atmospheric Administration.
Members of the National Guard and Reserves are eligible if called up to active duty under Title 10 authorization for over 30 consecutive days. The protections extend to service member’s spouses and dependents in certain circumstances.
To receive SCRA benefits related to auto loans, you must submit a written request along with a copy of orders to the lender. Work closely with your installation’s legal assistance office to ensure proper documentation.
Other Auto Loan Benefits
In addition to interest rates and repossion protection, the SCRA offers other benefits related to automobile leases and insurance:
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Early termination of auto leases – Vehicle leases that existed prior to active duty can be terminated without penalty if orders are 180 days or longer. Leases signed during active duty can also be terminated early under certain circumstances like PCS moves or deployment orders.
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Automobile insurance – Insurance companies cannot refuse or restrict auto insurance coverage solely due to active duty service. Premiums related to age may still be applied.
Seek Professional Guidance
Given the complexity of the SCRA, it’s highly advisable to seek guidance from your installation’s legal assistance office to fully understand eligibility and proper procedures. The Judge Advocate General’s Corps has financial counselors and attorneys well-versed in SCRA benefits.
While the SCRA provides critical protections, it is up to the service member to proactively claim benefits by notifying lenders and providing documentation. Don’t leave money on the table or risk repossession by failing to claim SCRA rights related to your auto loan.
For active duty service members, the SCRA provides two major benefits related to auto loans – capping interest rates at 6% and preventing repossession without a court order. These protections provide substantial financial savings and flexibility for managing payments during active duty commitments. By properly claiming benefits, service members can reduce loan costs and avoid losing vital transportation. Consult with your installation’s legal office to ensure you fully leverage the SCRA for your auto loans.
What is the SCRA?
The SCRA is an important consideration for auto finance companies when a loan becomes delinquent. It provides active duty servicemembers with protections that must be respected to avoid legal repercussions, as per the guidelines of the consumer financial protection bureau. This means active duty military service personnel can’t be subject to collection proceedings, repossession of a vehicle, foreclosure, or the loans incurred prior without first obtaining a court order. As such, auto finance companies serving active duty military personnel must stay apprised of all regulations surrounding the SCRA in order to remain compliant and protect their interests.
Auto Lending Under SCRA
Those who work in the auto finance industry should be aware of the following rules and regulations:
Interest rates
The SCRA caps interest rates on motor vehicle leases taken out before entering military service at six percent. Borrower’s military service are expected to notify their auto finance company in writing, along with accompanying proof of military orders, to get the rate adjusted.
As an added layer of security for both borrowers and lenders, it’s important for motor vehicle companies to regularly check for borrowers’ military status and adjust their interest rates accordingly. This process is often referred to as “scrubbing,” meaning that motor vehicle companies must keep abreast of their customers’ active duty service in order to provide the best service possible while mitigating risk.
Repossession
The consumer financial protection act provides servicemembers with additional protections from repossession of their vehicles while they are on active duty. In some cases, a court order may be required to repossess a servicemember’s vehicle.
However, the court has the authority to make an alternative or additional decision regarding the repossession, such as making creditors return payments made on loan before granting repossession or staying car repossession proceedings altogether.
In some cases, the court may even require that the creditor pay servicemembers the difference in value between their car and the remaining debt balance. These SCRA protections far exceed those of their civilian counterparts and provide valuable scrapes for servicemembers while they are away protecting our nation.
Repossession for breach of auto lease
Repossession of a vehicle leased prior to military service is an unfortunate reality for military families. According to the SCRA, military servicemembers are protected from terminating contracts due to nonpayment or breach without a court order. If military servicemembers can demonstrate how active military service hinders their ability to comply with contract terms, the court may issue a stay of repossession to allow them more time for compliance.
Lease termination rights
A servicemember who signed a lease before going on active duty may cancel that lease without penalty. An active-duty servicemember who signs an auto lease is generally required to abide by that lease. But not if they get PCS orders outside of the continental U.S. or orders to deploy.
The Servicemembers Civil Relief Act – Know Your Protections and Benefits!
FAQ
How does SCRA work with car loans?
What loans are not covered by SCRA?
Does military Lending Act apply to auto loans?
What is the interest rate cap on a SCRA auto loan?
What should I know about auto repossession and protections under SCRA?
I’m in the military and having trouble paying my auto loan. What should I know about auto repossession and protections under the Servicemembers Civil Relief Act (SCRA)? The SCRA gives active-duty servicemembers certain legal and financial protections relating to installment contracts, like an auto loan or lease.
What are the SCRA rules & regulations for car loans?
Lenders must adjust interest rates on car loans taken out before servicemembers go on active duty.While service members are supposed to submit a written notice and military orders to their lenders to get
What is SCRA & how does it work?
What Is SCRA? The Servicemembers Civil Relief Act (SCRA) provides legal and financial protection to eligible active duty servicemembers. It includes benefits such as a 6% interest rate cap and foreclosure protections. However, effective April 1, 2022, Navy Federal is offering a lower maximum interest rate of 4% to eligible member accounts.
What if you don’t know about auto lending & SCRA laws?
Ignorance of auto lending and SCRA laws is no excuse. It’s important for anyone in an industry that deals with servicemembers keep an eye on the laws. Violations — even unintentional — can result in fines and penalties. Business owners and managers must regularly determine which of its customers has active military status.