The Servicemembers Civil Relief Act protects Service Members against damaging financial actions while they serve. One of the main protections outside of stays on foreclosure, evictions and repossessions is the SCRA interest rate cap at 6% APR. It helps prevent excessive interest charges from accruing during a period of deployment or other service.
However, in order to use the 6% interest rate cap to your advantage, you need to know how to implement it correctly with your creditors. These seven tips help ensure you can minimize interest charges while you serve.
Tip #1: In most cases, you must request a rate reduction in writing
With the exception of federal student loan debts, you have to make all requests for rate reductions in writing. You basically have to send the creditor or lender a letter that details when your service period starts and ends. You should supply a copy of your military orders.
Once the creditor receives your notice of military service, they cap your rate starting on the day you start active duty. The SCRA caps interest rates at exactly 6%. This applies to mortgages, car loans, personal loans, credit cards, store credit accounts, and any other type of debt – even a payday loan.
If you have federal student loans, there is no need to request an SCRA interest rate reduction in writing. The servicer automatically receives notification of your service. If you have rates higher than 6% on federal student loans, they automatically cap on the date you’re called to serve.
Tip #2: The cap extends beyond service, but only on mortgages
The SCRA interest rate cap starts on the date of your service. For most loans and credit cards, the cap ends on the day your service ends. However, for any housing-related debt the cap remains in place for up to one year following your release from service. This applies mortgages, trust deeds and all other housing securities, such as HELOCs (home equity lines of credit).
Tip #3: The payment amount gets reduced accordingly
In most circumstances, when you reduce the interest rate applied to a debt, you also reduce the monthly payment requirement. Accrued monthly interest charges often account for a significant portion of each payment that you make. For instance, on a credit card at 15% APR, roughly half of the minimum payment requirement covers interest charges.
The SCRA stipulates that lenders must apply the 6% interest rate reduction accordingly to the payment requirement. So, in most cases, your monthly payments should decrease, too. The lender is not allowed to keep your payment the same and accelerate principal debt payoff. They must apply the rate reduction to the payment calculation automatically. They should also inform you what your new payment requirement would be during service.
Tip #4: You can apply this retroactively to forgive interest charges
If you forget to request a rate reduction before you deploy, don’t worry! The SCRA has a built-in system to apply the cap retroactively. You can provide written notice of military service up to 180 days after release from service. If you request the reduction within that window, the creditor must forgive all interest charges applied that are over 6%.
In many cases, the creditor or lender may simply credit your account. So, let’s say you have a credit card at 20% APR with a balance of $5,000. If you apply retroactively for an interest rate reduction, the creditor would reduce your rate by 14%. For a six-month period of service, the account would accrue roughly $492 in interest charges at 20% APR.
However, if you request the cap retroactively, the total interest charges for than 6-month period would be roughly $143. The creditor would likely credit your account for the $349 difference.
Tip #5: This also applies to taxes and assessments
It’s important to note that the SCRA interest rate cap also applies to penalties and interest on taxes and assessments. That’s a big deal, considering that the IRS can apply penalty interest charges up to 25%. That high of a rate means interest charges stack up quickly on tax debt.
In this case, the application of the 6% cap is also automatic. You can usually expect any federal agency to apply the interest rate cap automatically. So, just like federal student loans, tax debt receives an automatic rate cap because it goes through a federal agency.
Tip #6: Creditors can attempt to fight the cap in court
It’s important to note that a creditor can ask the court to waive the 6% interest rate cap. The court would only grant a waiver if the creditor can show that military service should not affect your ability to pay a higher rate. This is not common and doesn’t apply to rate reduction requests made in most circumstances.
Just be aware that if a creditor gives you any trouble on a rate reduction, this is a possibility. But it’s not likely and usually not something that you have to worry about.
Tip #7: This applies to all charges and fees, but not insurance
The SCRA stipulates that interest charges include all service charges, renewal charges, fees and other charges. This basically prevents a creditor from tacking on other fees punitively to make up the difference in a rate reduction. All charges in total cap at 6%, regardless of what the creditor calls a particular fee.
The only exception is for bona fide insurance. That’s any insurance you already voluntarily approved to add to your account. If you insured a credit line for some reason, those charges are separate from the charges included in your capped interest.