Servicemembers Act helps, but soldier, straighten up your debt
Law limits loan rates to 6%, but controlling debt is 1st priority
By Jane McNamara
Let's Talk Credit
Dear Let's Talk Credit,
Is there a limit to how much interest military members are
charged for an auto loan? -- Tatiana
I believe you
are asking about the Servicemembers Civil Relief Act. This law provides that
interest rates for credit obligations incurred before active military service is limited to 6 percent, including
credit card debt. The monthly payment amount must be lowered by the amount of
interest savings, and all interest above 6 percent must be permanently
forgiven. The Act protects all active duty service members, including those in
the National Guard and Reserve units while they are called to active duty.
If you are
currently serving in the military on active duty and your auto loan was obtained
before you started active duty, the provisions in the act are relevant to your
loan. You must send written notification with copies of your military orders
for the interest rate limitation to be applied to your credit obligations. One thing
you should keep in mind is that a creditor can request relief from the court
for the interest rate limitation. What that means to you is the court may
decide that your ability to pay is not affected by your active duty service and
deny your request for the lowered interest rate provided for in the act.
Should you have
trouble making your car loan payments after beginning active duty military
service, the interest rate limitation provided by the Servicemembers Civil
Relief Act may not help as much as you may like. For example, a four-year auto
loan of $15,000 at 15 percent interest would require a monthly payment of $417.
Reducing the interest rate to 6 percent interest would decrease the monthly
payment to $352, a difference of only $65.
that you review your car loan and determine if the savings from the lower
interest rate would be enough to allow you to meet your monthly loan
obligation. If it does not, you might consider selling the car or trading it in
for a vehicle that you can afford. Do not stop making payments. Car loans are
considered in default after just one missed payment and the lender has the
right to repossess the vehicle once the loan is in default. If the lender
repossesses your vehicle, it likely will sell the car at auction. Such sales
often yield far less than what is owed on the loan and you would be responsible
for the difference. In addition, other fees will likely be added to your balance,
increasing the amount you will owe, even after the car is gone.
See related: Military families under fire at home from predatory lenders,
That 6% rate for active-duty military not always easy to claim
Meet CreditCards.com's reader Q&A experts
Vexed by a personal finance problem?
CreditCards.com's Q&A experts answer questions from readers every weekday. Ask a question, or click on any expert to see their previous answers.
Published: July 4, 2013