Struggling to get out from under a pile of debt is a big task, whether you’re a military veteran or not. But unlike some civilians, there’s a high chance you have had to deal with unavoidable factors such as several relocations to areas you’re unfamiliar with and unemployment among a partner or spouse during active duty.
U.S. veterans are vulnerable to falling into debt
These factors and others, such as living outside of your means, can act as a catalyst to money issues and also make you more vulnerable to falling into debt. In fact, a study of veterans’ finances found that military veterans are more likely than other consumers to report problems managing their credit.
Given that there are 22 million U.S. veterans, representing 8% of the U.S. population, this is a huge red flag. But that doesn’t mean you have to be in debt forever. Tools and strategies such as debt consolidation can be a good option to consider depending on your situation.
What exactly is debt consolidation?
If you have heard the term “debt consolidation” get thrown around but aren’t sure what it is or how it works, let’s hit the pause button for a moment. Learning about what you’re getting yourself into before you dive in is important, especially when it comes to finances.
Debt consolidation, also sometimes referred to as consolidating credit card debt, is a method used to simplify paying back debt owed to creditors, ideally at a lower interest rate, so you don’t have to pay back quite as much.
The main strategy behind this method is combining your loans into one, taking out one big loan that can cover your existing debt, and leaving you with just one loan to repay and manage.
How It Works
This practice most commonly applies to paying off unsecured debt, such as high-interest credit cards, medical bills, and personal loans. It does not commonly apply to paying down secured debt, tied to assets such as mortgages and auto loans, but there are a few options available.
For example, if you have 5 credit cards carrying high balances and aren’t sure how you will pay off, consolidating them would mean rolling all your payments into one new loan and making a single payment each month towards that loan, which gets allocated appropriately until your debt is fully repaid.
Depending on your creditworthiness, you may also be able to secure a lower interest rate when rolling balances into one, saving money on interest you may have otherwise had to pay.
In a nutshell, consolidating debt into a single loan could reduce your interest rates, decrease your overall debt, and alleviate a lot of the stress that comes with staying on top of multiple loans.
How debt consolidation for veterans is different
There’s a lot of crossover between debt consolidation options for veterans and others, but as a veteran, you have special access to programs, terms, and organizations that could further aid in the process of helping you pay down your debt.
The key is understanding your options – what you can benefit from now versus what you may have been able to benefit from when you were on active duty.
For example, while active duty service members benefit from the SCRA (Servicemembers Civil Relief Act) and the Military Lending Act with certain protections against interest rates during their term of duty, those acts don’t extend the same protections when you become a veteran.
This example isn’t meant to further frustrate you but rather to illustrate that things can change over time when you transition to post-duty life, so it’s important to understand what’s available to you.
Debt consolidation options for veterans
1. VA Loans
VA Loans are specialized home loans only available to veterans. While they’re backed by the Federal Government, these loans are provided by private lenders, such as banks and mortgage companies. The VA guarantees a portion of the loan, which enables the lender to provide you with more favorable terms that you might not have otherwise received.
On its own, simply having this loan does nothing to help you directly with consolidation, but it does make you eligible for IRRRL and MDCL loans (see below).
2. Interest Rate Reduction Refinance Loan (IRRRL)
Also called the Streamline Refinance Loan, the IRRRL can help you obtain a lower interest rate by refinancing an existing VA loan.
It can be done with no money out of pocket, meaning all costs may be included in the new loan or by making the interest rate on the new loan high enough to cover the costs of the lender – an important detail to consider when learning about your options.
3. Military Debt Consolidation Loans (MDCL)
If you went through the VA to get a mortgage with a VA home loan, you are eligible to use a Military Debt Consolidation Loan (MDCL). This loan acts as an intermediary borrower against the equity built up in your home, so it’s like a home equity loan specifically meant for veterans.
4. Debt Consolidation Loans With Specialized Terms
If you’re not a homeowner or prefer not to borrow against the equity built up in your home, you still have specialized options available for debt relief and credit counseling.
Partnering with an agency such as VA Financial could help you receive up to $40,000 to repay unsecured debt often at a lower interest rate. Active and retired service members are eligible to apply, along with military family members.
Other agencies that offer consolidation to all consumers sometimes have special discounts or waivers for members of the military. Consolidated Credit, for example, waives all program setup fees for veterans and their families.
5. Leave No Veteran Behind (LNVB)
This national 501(c)3 non-profit organization provides educational employment services to veterans facing economic hardship. One arm of LNVB is providing retroactive scholarships that pay off the student loans of veterans who have completed some form of higher education but weren’t fully covered by veteran educational programs such as the GI Bill.
The organization also provides support with helping veterans find employment opportunities and form leadership skills.
Frequently asked questions
Are there personal loans for veterans?
Many lenders issue personal loans to veterans. Interest rates on these loans will vary depending on your credit score, but lenders can’t legally charge more than 36% under the Military Lending Act. If you qualify for a personal loan, you can use the money for almost any reason, from consolidating credit card debt to making needed repairs on your home or vehicle.
Does Navy Federal do debt consolidation loans?
Yes. Navy Federal Credit Union offers personal debt consolidation. You can use their loan calculator to find out if debt consolidation is the right choice for your financial situation.
Can I get a loan against my VA disability?
While the VA doesn’t issue loans to help you access your disability pay early, private lenders do offer loans to disabled veterans, and many will consider your disability benefits as income for the purpose of qualification. Navy Federal Credit Union and USAA are both good choices.
What is a VA cash out loan?
A VA Cash-Out Refinance Loan allows homeowners to borrow against their home equity. This loan can be used to consolidate debt, fund education, or pay for home repairs or improvements.
What is a VA hardship?
If you are experiencing debt and struggling to make your VA health care payments, you may want to learn more about VA hardship. If your out-of-pocket healthcare expenses increase or your income decreases, you may be eligible for a VA hardship determination, which allows you to be exempt from paying any copayments for the rest of the year.
How to leave debt behind for good
The bottom line is that regaining control of your finances and becoming debt-free is possible. And, it’s good to keep in mind that debt consolidation is just one strategy among a handful of others for paying off debt.
With the help of specialized debt relief programs for veterans, you can pay off your loans, rebuild your credit (and perhaps establish a fresh credit line), and leave debt behind for good.
Understanding and weighing your options before making a choice can help improve your chances of financial success in the future, and set you up on a good foundation going forward.