Serving our country with the U.S. Armed Forces requires many sacrifices. It can be tough on service members, veterans, their families — and their household finances.
Fortunately, military service members and veterans who need a loan have several borrowing options open to them. Even better, many loans for military families provide important benefits and protections.
This guide will walk you through four main types of loans, so you can understand the options and benefits available to you:
Federal and private student loans
VA-guaranteed loans and other mortgage options
Auto loans for military members
Military personal loans
Student loans for military families
Military families can pay for college with the help of several forms of financial aid offered to dependents of service members, including children, stepchildren, and spouses. Some programs also offer student aid and scholarships to help veterans complete their own educations.
Even with this help, however, some college students might need to borrow for their education. There are two main types of student loans for military families, just as for civilians: federal and private.
Federal student loans
Federal student loans are offered to most college students, including those serving in the military and those with family members who’ve served.
Students don’t have to meet credit requirements to take out federal student loans. You only have to meet eligibility requirements for federal aid, such as submitting the Free Application for Federal Student Aid and making sufficient progress toward a college degree.
This chart shows some of the requirements and rates on federal student loans:
|Federal Student Loan||Who can use it?||Credit requirements||Interest rate (2018-2019)||One-time loan fee||Annual loan limit|
|Direct Subsidized||Undergraduate students with a demonstrated financial need||None||5.05%||1.066%||Up to $5,500 per school year|
|Direct Unsubsidized||Undergraduate students||None||5.05%||1.066%||Up to $7,500 per school year for dependent students; up to $12,500 per school year for independent students|
|Direct Unsubsidized (for graduate students)||Students working toward a graduate or professional degree||None||6.60%||1.066%||Up to $20,500 per school year|
|Direct PLUS||Graduate students and parents of undergraduate students||Nonadverse credit||7.60%||4.264%||Cost of attendance minus other financial aid received|
There are several benefits offered on federal student loans for military families. You can defer payments during active duty, for example. You might even get help paying off your debt through federal programs that provide military student loan forgiveness and repayment assistance.
Private student loans
Because federal student loans come with unique advantages, such as repayment plans based on your income and no credit requirements, they should probably be your first choice for student loans. But private student loans can offer additional financing when needed.
Before turning to private student loans, however, military families should understand how they differ from federal loans. This private debt doesn’t qualify for forgiveness or repayment assistance through federal programs, for example. You’ll also need to take additional steps to get private student loans:
Compare student loan rates: While all borrowers get the same rates on federal student loans, private student loan rates vary from lender to lender. Take time to shop around and compare private student loans to find the best deal.
Prepare to qualify: Private lenders have strict requirements for credit, income, and employment. The majority of college students won’t qualify for a private student loan on their own and will need to apply with a cosigner.
Pay attention to repayment terms: Check to see if your private student loans offer deferment for enrolled students or active-duty military members.
One benefit offered on both federal and private student loans is granted through the Servicemembers Civil Relief Act. When you’re on active duty, this act requires all lenders to drop rates to 6.00% on student loans you took out before joining the military.
VA home loans
When it comes to buying a home, one of the most popular options for military families is the VA-guaranteed loan. In fact, over 740,000 VA loans were funded in 2017 alone, with the average balance at $254,870, according to the Department of Veterans Affairs.
“VA home loans can be a great way to buy a home,” said Gerri Walsh, senior vice president of investor education at the Financial Industry Regulatory Authority (FINRA). While these loans are offered by private lenders, “the VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms.”
You could get the following benefits:
- No down payment is required with a VA loan. Compare that to the 3% minimum down payment required on FHA or conventional mortgages, or the median 6% down payment reported by the National Association of Realtors for first-time homebuyers.
- VA loans don’t need mortgage insurance. Most lenders require mortgage insurance on a loan balance at 80% or more of the home’s value, a cost that’s packaged into or added onto the mortgage. VA-backed loans are effectively insured by the federal government, removing any need for mortgage insurance.
- There are no VA loan credit requirements. It can be difficult to buy a home with bad credit since many lenders won’t approve you for a mortgage. VA loans, however, don’t consider credit scores. Instead, the lender reviews your entire loan profile before deciding on whether to lend to you.
These benefits help hundreds of thousands of veterans access affordable mortgages regardless of their credit or other underwriting factors.
Other home loan options for veterans and military members
Veterans shouldn’t default to a VA loan, however. “VA loan rates are often not the lowest available,” Walsh pointed out. A funding fee of up to 3.3% also adds to the costs of VA home loans.
That means a conventional mortgage might actually offer a better deal for homebuyers with great credit. Find the best deal by collecting and comparing rate quotes for multiple types of mortgages, including VA loans.
Additionally, the costs and structure of a VA loan can tempt a veteran into buying more house than they can afford.
“If the housing market declines, a service member with little or no equity in the home can quickly find themselves underwater on the loan,” Walsh warned.
Auto loans for military members and veterans
Unlike with home and student loans, you won’t find federal programs that help you pay for a car or that offer auto loans to military families. But many car manufacturers offer discounts to service members buying cars. You could even get a military discount on your auto loan.
Since auto loans are guaranteed by the value of your car, they present less risk to lenders. You’ll likely qualify more easily and secure lower rates on a car loan than you’d get on unsecured debt.
To make sure you’re getting the best deal on your auto loan and your car, Walsh recommended separating these two purchases. “Auto loans can be a big profit center for new and used car dealers,” she pointed out. “Bringing your own financing to the table before making a purchase can be a good strategy.”
First, collect auto loan rate quotes from multiple lenders. Try to request all of these offers within two weeks of each other. Many auto lenders will use a hard credit check to generate your quote, and keeping these inquiries grouped together will limit their negative effect on your score.
Here are a few types of auto financiers military families can consider:
Military personal loans
Personal loans can be used to finance almost anything, from relocation expenses to credit card consolidation. As with auto loans, there are no federal programs that offer personal loans for military families. But many lenders provide personal loans that can meet the needs of a veteran or active-duty service member.
Of the types of military loans listed here, unsecured personal loans generally have the highest lending standards. To secure a personal loan, you’ll need a credit score of at least 580. Lenders reserve more affordable rates and terms for borrowers with scores of 700 or higher.
Even if you can qualify for a personal loan, Walsh cautioned against borrowing more than you need — and can afford to repay. Use our personal loan calculator to project repayment terms. Make sure your payments will be affordable. You should also shop around to find the best personal loans for veterans or service members.
Stay away from military payday loans
“Finally, avoid alternative products, such as payday loans, auto title loans, own shops, tax advance loans, and rent-to-own stores,” Walsh advised. “These kinds of loans can trap unwary borrowers into long-term contracts with very high interest rates.”
If you do need cash fast, consider less-expensive alternatives to payday loans such as ARK from the PenFed Foundation, which offers funds up to $500 for a $5 fee.
5 steps veterans and service members should take before borrowing
The financial realities for veterans and active-duty military personnel aren’t always easy to navigate. Military families need to be careful when deciding whether to take on the burden of debt.
“Borrowing always involves costs that extend well beyond the interest you inevitably pay, and these range from out-of-pocket fees to the opportunity costs of loans,” Walsh said.
Military members and veterans who stay informed about the cost of borrowing will be able to take on and manage their debt with wisdom. Here are some steps veterans, service members, and their spouses can take to ensure they secure the best loans available to them.
1. Take advantage of military-provided financial counseling
The counselors hired to advise military members on their finances are professionals with years of experience and knowledge. They work with you to examine your financial situation, from reviewing your pay designation to helping you set a budget, Walsh said.
These counselors are also familiar with the financial challenges you may face and your available options as a military member. With this knowledge on hand, they can work with you to identify the most beneficial way to borrow what you need.
Best of all, this financial advice is free to military families. It’s part of the benefits provided to help military members focus more on their mission and worry less about their money.
2. Read up on laws about military loans
You can also find out more about the laws that protect veterans and military members from unfair lending practices.
Take, for example, the Military Lending Act. It makes it illegal for lenders to charge rates above 36.00% APR on most loans. Lenders also can’t make you pay prepayment penalties, pay through mandatory allotments, or waive your protections under consumer protection laws, according to the Consumer Financial Protection Bureau (CFPB).
The Servicemembers Civil Relief Act (SCRA) provides additional debt relief. “The primary purpose of the SCRA is to ease legal and financial burdens on military personnel and their families brought on by the demands of active duty,” Walsh said.
While you’re actively serving in the military, lenders are required to limit rates to 6.00% on debt you previously took out, according to the CFPB. It also protects you from loan foreclosures or repossessions while you’re on active duty.
3. Build up your credit
One of the best ways to make sure you can get approved for affordable loans is to improve your credit. By doing so, you’ll have access to more lenders and loans, and you’ll pay less for financing.
“Service members should find out their credit score and learn what goes into determining what factors are considered in their score,” Walsh said. Military families can get free credit scores and reports through their military installation’s personal finance counselors or through FINRA’s free credit score and analysis tool for military members.
4. Consider military-affiliated institutions
Most service members have heard of military-focused banks such as USAA, PenFed Credit Union, and Navy Federal Credit Union.
“Military-affiliated banks and credit unions have provided great service to military personnel and their families for decades,” and they understand the demands of military life in a way that other lenders might not, Walsh said.
Some even have products and services specific to military members. USAA, for instance, lowers interest rates for active-duty service members even further than required under SCRA rules, putting them at 4.00%.
5. Always shop around for loans
While military loans and banks can be a great place to start your search for credit, take time to look elsewhere, too. “Even military-affiliated banks and credit unions are subject to market conditions — the military-affiliated bank or credit union might not have the best rates for you,” Walsh pointed out.
“Always shop around for financial products. And for any type of loan, be sure to compare interest rates and terms, including penalty provisions,” she added.
Interested in a personal loan?
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