Military veterans who are struggling with debt may want to consider a debt consolidation loan backed by the Veterans Administration. There are significant benefits to obtaining a Military Debt Consolidation Loan, but it’s important to understand how they work to determine if this type of loan is right for you.
What Is A Debt Consolidation Loan?
If you owe a number of different creditors and/or have outstanding loans with high interest rates, a debt consolidation loan allows you to pay off all of what you owe to your current lenders. Then, you’re only obligated to pay back one creditor, which is the bank or institution that provided your consolidation loan.
This allows you to only worry about one monthly payment instead of several, which can help you avoid late fees if you occasionally forget to pay one of your creditors. Additionally, debt consolidation loans may allow you to take advantage of a lower interest rate. Over time, interest on debts owed can add hundreds or thousands of dollars to what you have to pay, so a loan with a low interest rate can help you reduce the time and money it takes to eliminate your debt.
How Do Military Debt Consolidation Loans Work?
The first thing that you should note is that MDCLs are backed by the government, but they are not provided by the Veterans Administration. The VA puts limits on lenders, such as caps on closing costs, interest rates and fees, but you’ll still be obtaining your loan from a standard financial institution.
Along with the fact that loans are only backed by the government, you should also be aware that MDCLs are home equity loans, so they are secured loans. Unsecured loans do not require that you put down collateral, and credit cards are an example of unsecured loans. The downside of a secured loan is that if you’re not able to pay it back, whatever you’ve put down as collateral may be taken by the bank. In this case, it would be your home.
By taking out a home equity loan, you are borrowing against the value you have built up in your home. If you do not own a home or have a lot of equity in it, this type of loan is probably not going to be available to you.
Obtaining A Military Debt Consolidation Loan
To qualify for an MDCL, you have to meet a few basic criteria, and most are the same as for a standard loan. Qualifications include owning a home with equity in it, having the ability to repay the loan and meeting credit requirements. You will also need to provide a certificate of eligibility, which proves to a lender that you qualify for a VA-backed loan.
You can apply for an MDCL through any lender that participates in the VA program. The VA does not put a cap on loan amounts, so it’s up to the lender to determine the size of the loan they will provide. These loans do not generally require down payments, and there is usually not a requirement to pay a mortgage insurance premium. Closing costs may be reduced or even covered by the lender, but even if you are responsible for closing costs, the VA has capped what you’ll have to pay.
If you are interested in consolidating your debt, you may be able to obtain better loan terms by getting a VA backed MDCL. However, before applying, you should take into account that these are secured loans based on the equity in your home.