The Servicemembers Act limits rates for loans to active-duty military personnel, but controlling debt should be a soldier’s first financial duty.
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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.
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.
I recommend 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.
Let’s keep talking!