Studies show that almost 35% of service members can’t pay their bills on time. About 27% of them have more than $10,000 in credit card debt.
With inflation and the economic fallout of COVID-19, staying out of debt has become an everyday war for military families. There is a proven battle plan, however.
Debt consolidation loans and programs have helped millions of consumers. Simply put, high-interest debt like credit cards and payday loans are combined into one bill. It’s paid from a low-interest loan you get on your house.
Though your total debt doesn’t change, the reduced interest charge allows you to make a single monthly payment that’s lower than the combined bills you were previously on the hook for.
While debt consolidation has benefits for civilians, it has even more ways to help veterans and active-duty military members. Here are the basics:
Dealing with debt can be stressful especially if you have multiple high-interest debts like credit cards or personal loans. VA debt consolidation loans allow you to roll multiple debts into one new loan at a lower interest rate, reducing your monthly payments and saving you money over time. In this comprehensive guide, we’ll explain what VA debt consolidation loans are, their pros and cons, eligibility requirements, and tips for getting the best rates and terms.
What Are VA Debt Consolidation Loans?
VA debt consolidation loans allow eligible veterans and service members to consolidate multiple unsecured debts into one new loan backed by the VA. This new VA loan has a lower interest rate than high-interest credit cards or personal loans.
Consolidating debt with a VA loan converts unsecured debt like credit cards into secured debt tied to your home equity. The VA guarantees a portion of these loans, so lenders view them as less risky than other debt consolidation options. This allows veterans to qualify for lower interest rates.
A VA cash-out refinance is one common way veterans can access funds to pay off or consolidate other debts. You take out a new mortgage for more than what you currently owe on your home and use the extra funds to consolidate debts.
The Pros of Using VA Loans for Debt Consolidation
There are several potential benefits to consolidating debt with a VA backed loan:
-
Lower interest rate – VA loans often have interest rates 2% or more lower than credit cards or personal loans, This saves you money each month
-
Single payment – You’ll only have one monthly payment to one lender rather than multiple payments. Simpler to manage.
-
Pay off debt faster – The lower rate helps you pay off the consolidated balance quicker.
-
Improve credit score – Having fewer open accounts and less credit card debt utilization can improve your credit over time.
-
Access cash – Cash-out refinancing provides funds to pay off debts while keeping your monthly housing payment affordable.
-
Tax benefits – VA loans don’t have private mortgage insurance and interest may be tax deductible.
The Potential Cons of VA Debt Consolidation
There are also some potential drawbacks to think about:
-
Closing costs – You’ll have to pay closing costs for the new loan, often 2-5% of the overall loan amount.
-
Lower equity – Cashing out home equity through a refinance leaves you with less equity in your home.
-
Longer mortgage term – Consolidating into a new 30-year mortgage restarts the clock, increasing total interest paid over the life of the loan.
-
Risk of default – There is risk of losing your home if you can’t make the new consolidated loan payment.
VA Debt Consolidation Eligibility Requirements
To qualify for a VA debt consolidation loan, you must meet VA loan eligibility requirements:
- Be an eligible veteran, service member, or qualifying surviving spouse
- Have adequate credit score and debt-to-income ratio
- Occupy the home as your primary residence
- Have sufficient equity in the home
For a VA cash-out refinance, you’ll also need at least 15% equity in your home to get the maximum loan-to-value ratio. The more equity you have, the more cash you can take out to pay other debts.
Tips for Getting the Best VA Debt Consolidation Loan Terms
Follow these tips to improve your chances of getting approved and get the best interest rate and terms on your VA consolidation loan:
-
Shop lenders – Compare quotes from multiple VA approved lenders to find the best deal. Even a small rate difference can save thousands over the loan term.
-
Check your credit – Review credit reports and improve your score before applying. The higher your score, the better your rate.
-
Pay down balances – Try paying down credit card and other debt balances before consolidating to qualify for better terms.
-
Choose shorter term – Opt for a 15-year mortgage term rather than 30-years if you can afford higher monthly payments. You’ll pay off the loan and debt much faster.
-
Make down payment – If possible, make a down payment of at least 20% to avoid paying private mortgage insurance premiums.
-
Lower debt-to-income ratio – Reduce other monthly debts as much as possible so more of your income is available for the new consolidated payment.
Weighing the Pros and Cons of VA Debt Consolidation
The bottom line is that VA debt consolidation can be a smart financial move for eligible veterans and service members struggling with high-interest rate debt. It can provide the funds needed to finally pay off credit cards, personal loans, medical bills, and other debts once and for all.
However, it’s wise to carefully consider both the advantages and risks before moving forward. Cashing out home equity to pay debts reduces your equity while extending your mortgage term. Make sure you can comfortably make the new monthly payments over the long run.
Analyze your specific financial situation, shop VA lenders for the best rates, and consult a financial advisor if needed before deciding if VA debt consolidation is your best path forward. Used strategically and responsibly, a VA debt consolidation loan can put you back on solid financial footing.
Debt Consolidation Tips for Service Members and Families
About 35% of veterans had trouble paying their bills in the first few years after leaving the military, according to a 2019 Pew Research study. Almost 30% received unemployment benefits, and 12% said they received government food benefits.
While an MDCL can help get you out of a financial hole, there are things you can do to avoid it in the first place.
The last thing a Ranger needs to think about before jumping out of a C-17 aircraft is “Hold on. Did I pay my Visa on time this month?” Even if you’re not in combat, dealing with bills is doubly difficult when you’re away from home.
Getting an MDCL before deployment lets you focus on your mission, not that pesky auto loan.
What Is a Military Debt Consolidation Loan?
A Military Debt Consolidation Loan (MDCL) is also called a VA Consolidation Loan. It’s similar to other debt consolidation loans, except you must have a VA loan on your house.
An MDCL is considered a “cash out” loan. You refinance our current VA loan for more than the amount owed and take the difference in cash.
For instance, if you owed $75,000 on a house appraised at $100,000, you could take out a $100,000 loan. You have $25,000 in cash (minus closing costs) to pay off those high-interest credit cards and other debts.
One advantage over a civilian debt consolidation loan is that an MDCL is guaranteed by the VA. Such loans also typically have lower interest rates than non-military loans.
You should bear in mind that a MDCL turns unsecured debt like credit cards into secured debt. Your home is collateral, so you could lose it if you default.
How To Get a Debt Consolidation Loan With Navy Federal
FAQ
Does the VA have a debt consolidation loan?
Can I get a loan from VA to pay off debt?
Is there a VA debt relief program?
Can I get a debt consolidation loan from the government?