credit & debt

Lower Loan Rates for the Military

Some active-duty personnel can take advantage of a 6% interest-rate cap.

Members of the military may qualify for special protection that caps the interest rate on credit cards, mortgages and other loans at 6% while they are on active duty.

To be eligible for the interest limits provided under the Servicemembers Civil Relief Act, you must have incurred the debts before you entered active duty, and your military service must affect your ability to repay them. Although people who took a pay cut to join the military can benefit from the law, it is most helpful for members of the Reserves and National Guard, who often must leave higher-paying civilian jobs for months, or even years, when called up. (Credit cards, mortgages and other loans taken out jointly with a nonmilitary spouse also qualify for the rate reduction.)

June Walbert, a certified financial planner for USAA and member of the U.S. Army Reserve, took advantage of the law when she was deployed to Iraq in 2003. She notified her mortgage company, sent a copy of her official orders, and had her rate reduced by about two percentage points while she was on active duty for six months.

You can request the rate reduction on your own or get help from an Armed Forces Legal Assistance office (see contact information and sample letters to send to lenders). To prove that your income has been reduced, you may be asked to submit copies of your military orders, earnings statements and tax returns. But you don't need to mount a lobbying offensive to support your case.

"The creditor has the burden of proof to show that the service member's entry on active duty did not materially affect his or her ability to meet financial obligations," says Samuel Wright, director of the Service Members Law Center for the Reserve Officers Association.

Your rate will jump back up after your active duty is over, but the higher rate will only apply to the remaining balance. "The extra interest -- the difference between the higher and the lower rate -- while on active duty is forgiven, not just deferred," says Wright.

To make the most of the provision, pay down as much of your credit-card balances as possible while the rate is low and more of your payment will go toward the principal rather than interest.

The Servicemembers Civil Relief Act provides other benefits -- such as giving you the right to terminate an apartment lease if you have a permanent order for a change of station or are deployed to a new location for 90 days or more. In addition, you can end a car lease without incurring an early-termination fee if you are deployed for 180 days or longer.

For more information about the law and other personal-finance issues for military families, see Kiplinger's special report for military families.

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