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How Do Military and Veteran Debt Consolidation Loans Work?

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In a Nutshell

Debt consolidation loans help borrowers roll all of their outstanding debts into one loan with a single payment. Some borrowers face challenges in getting these loans, but the Department of Veterans Affairs (VA) offers some debt consolidation options to active duty servicemembers and veterans, including the VA Military Debt Consolidation loans. Borrowers who meet the requirements for this consolidation loan can borrow against the equity in their home. This comes with some pros and cons, which we’ll explore more in this article.

Written by Attorney Tori Bramble
Updated October 8, 2021

Debt consolidation loans help borrowers roll all of their outstanding debts into one loan with a single payment. Some borrowers face challenges in getting these loans, but the Department of Veterans Affairs (VA) offers some debt consolidation options to active duty servicemembers and veterans, including the VA Military Debt Consolidation loans. Borrowers who meet the requirements for this consolidation loan can borrow against the equity in their home. This comes with some pros and cons, which we’ll explore more in this article.

Debt Consolidation Loans: The Basics

A debt consolidation loan is a single loan that borrowers can take out to pay off multiple debts, such as high-interest credit card debt, medical bills, payday loans, and other debts. In other words, a debt consolidation loan allows you to refinance your existing debts.

Debt consolidation loans are generally used to consolidate unsecured debt, especially high-interest unsecured debt. Secured debt, like a mortgage or car loan, is backed by something of value called collateral, which the lender can take back if you default. Unsecured debt isn’t backed by collateral, which means if you don’t make your payments, it’s harder for the lender to get the money they loaned you back.

This valuable tool helps make your high-interest debt more manageable and your monthly payment more affordable. If you’re able to get a lower interest rate on your consolidation loan than you’re paying on your existing debt, you may also be able to pay off your debt faster. This allows you to tackle your debt more quickly while saving money on interest. It also streamlines your payment so you only have to make one monthly payment to your new lender. 

Your total debt doesn’t change after consolidating, but your new monthly payment may be significantly lower than the previous combined minimum monthly payments you were making on your credit cards and personal loans.

Pros and Cons of Debt Consolidation Loans

There are pros and cons to debt consolidation loans. The first and most helpful benefit of a debt consolidation loan is that it combines all of your high-interest debt into one monthly payment, ideally with a lower interest rate, which saves you money on interest. Another benefit is that you will know when your debt is going to be paid off. You’ll get a debt repayment schedule that includes the interest and principal and a definite start and end date for payments. So you’ll know exactly when you’ll be debt-free.

Another advantage of a debt consolidation loan is that it can help you build your credit. Credit cards are revolving debts, but a consolidation loan is an installment loan. Adding it to your credit mix can help boost your score. It can also reduce your credit utilization rate, which improves your credit score. Most importantly, making on-time payments reflects positively on your credit report and boosts your credit score. 

Despite these advantages, there are also some potential drawbacks. You may not qualify for a lower interest rate than you’re paying on your current debts. If your debt consolidation loan isn’t at a lower interest rate and/or if your payment term is extended, you may pay more interest on the debt you consolidated over time. If it doesn’t make sense to do a debt consolidation loan because you can’t get a lower rate, you might have to look for other debt payoff options. 

The loan might also be costly. You may have to pay upfront costs or fees over the life of the loan. This increases your monthly payment. Finally, another disadvantage is you could fall behind on your debt consolidation payments. If you miss an installment payment toward the new debt consolidation loan, it may leave you worse off than before. So it’s wise to make sure your monthly payment fits with your budget.

When To Consider Debt Consolidation

Debt consolidation may be a good fit if you have a good credit score but also have financial difficulties because of hefty unsecured debt and/or you’re having difficulty making on-time monthly payments on your existing debts. Everyone’s circumstances are different, so it’s best to find and schedule a free consultation with an accredited credit counselor to see if this is a good idea for you. A credit counseling agency is a nonprofit organization. Credit counselors evaluate your debts, budget, and overall financial situation and discuss your debt relief options with you. If they believe debt consolidation might be right for you, they will help you make a plan.

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Active Duty and Veteran Debt Consolidation Loans

Debt consolidation is available for both active armed forces servicemembers and veterans who own equity in a property. To take advantage of the Veterans Affairs (VA) financial aid programs for military personnel and veterans, you need to understand how your options change when you go from an active military member to a veteran. 

You may be eligible for a loan if you meet the basic service requirements set by the Department of Veterans Affairs, have a valid certificate of eligibility, and fully meet the lender’s credit and income requirements. Even if you don’t check off all the boxes, you may still be eligible depending on how you were discharged. These include hardship or reduction of force at government convenience, a medical condition or service-connected disability, or an early out of the military having served at least 21 months of a two-year enlistment. 

The Servicemembers Civil Relief Act (SCRA) and the Military Lending Act offer active duty military servicemembers some protection from getting sued without notice while they serve.

Military Debt Consolidation Loans

If you’re a veteran in debt, having a VA loan probably qualifies you for a Military Debt Consolidation Loan (MDCL), also known as a VA Consolidation Loan. MDCLs are cash-out loans, where a borrower refinances their existing loan for more than the amount owed and the difference is paid to them in cash. 

An MDCL increases your financial risk because, as a veteran, you aren’t protected against foreclosure under the SCRA. While an MDCL is a secured loan allowing veterans to borrow cash against their home equity, the loan amount can’t be more than the home’s appraised value.

Advantages of VA Military Debt Consolidation Loans

There are many advantages to VA military debt consolidation loans: 

  • It’s easier to qualify for an MDCL loan than for conventional consolidation loans. There are lower credit score requirements, for example. 

  • You can also get a longer repayment term, which can mean a lower monthly payment. 

  • You can get up to 100% of the value of your loan, also called loan-to-value.

  • You won’t have any monthly mortgage premiums or prepayment penalties with VA military debt consolidation loans. 

  • You’ll gain access to the Department of Defense’s Homeowners Assistance Program (HAP), a financial aid service for members of the military.

Disadvantages of VA Military Debt Consolidation Loans

There are also a few disadvantages to these loans. You can lose equity in your home. If you don’t make your loan payments on time, you’ll risk foreclosure. Lastly, there’s a limit on how often a veteran can take out a VA loan.

Requirements for MDCL

To qualify for the MDCL, you’ll need to meet quite a few requirements. You must own a property (with equity) as a prerequisite. You also must demonstrate that you have the ability to repay the loan when required. Veterans also have to provide a certificate of eligibility for a loan backed by the VA. 

It’s important to understand that your debt-to-income ratio largely determines if the VA will approve your MDCL. Your debt-to-income ratio is the percentage of your monthly gross income that goes toward paying debts. If your debt-to-income ratio is high you may not be approved. Essentially, if you owe more than your income can support to pay back your debts, the VA will consider you at risk of defaulting on future payments.

Also, some lenders cater to veterans with bad credit. Other lenders only offer loans to those with good credit. It’s important to research a lender’s reputation before signing any official paperwork. You don’t want to get scammed.

Closing Costs on VA Loans

VA consolidation loans come with closing costs. These costs are deducted from the final amount you receive from the loan proceeds, and there are restrictions on what banks and VA loan lenders can charge for them. This provides some protection for veterans.

Origination Fees

VA lenders can charge an origination fee. An origination fee is a charge that is set by the lender or broker for their services to provide you the loan. It is initiated when the loan officer takes your application and concludes when you sign the paperwork at closing. This charge can be up to 1% of the loan amount. Some brokers will automatically charge the entire amount. Some banks and lenders don’t charge an origination fee.

Funding Fees

VA loan lenders can also charge a funding fee. The VA funding fee is a one-time fee paid to the Department of Veterans Affairs that supports the VA loan program. Veterans who put down less than 5% on their home purchase will pay 2.3% of the total loan amount as first-time homebuyesr and 3.6% on subsequent loans. But VA borrowers have the opportunity to pay less on the funding fee by putting down more money on their homes. This fee changes periodically. 

Appraisal Fees

There are other fees that apply to a VA loan. The first is an appraisal approved by the VA. The VA appraiser determines the value of the home and makes sure that it meets the minimum property requirements for VA loans. But if you use a VA streamline to refinance a home, the VA appraisal is not required, and there’s no appraisal fee. 

Title Report and Title Insurance Fees

Next are the title report and title insurance fees. The title report and title insurance protect both the lender and owner in case someone else comes along and claims ownership rights to the house and is found to be the rightful owner. If this were to happen, the title insurance company would reimburse the lender and owner of the home for the loss. This fee varies because it is based on the purchase price of the home, the loan amount, and where the home is located. The title fee on a lower-priced home can be a few hundred dollars, while a higher-cost home can go over $1,000. 

There are two types of title fees. One is the lender’s title policy which protects the lender. The other is the owner’s policy which protects the future homeowner. In some areas, the seller pays for the homebuyer’s title policy, and the buyer pays the lender’s policy. Also, the homeowner’s policy usually costs more. In some cases, the buyer will pay for both the owner’s policy and the lender’s policy, doubling the title fee. You should make sure that the purchase and sale contract defines which parties are paying which fees so you don’t come across any hidden surprises along the way.

Other Fees

  • Recording Fee: This fee is set by the county or city where the home is located. Recording, in this case, means that the sale or refinance is public record where the county knows who is responsible for paying taxes on the property.

  • Credit Report Fee: The credit reporting agency charges this fee to lenders when they  pull a credit report to determine a borrower’s credit history. The credit report consists of three credit scores from the three major credit bureaus (Experian, Equifax, TransUnion). The middle score is used for qualifying a borrower. 

  • Flood Certification: Also known as a “flood cert fee.” If your property is in a flood zone you may be subject to this fee. Fortunately, most properties don’t meet these criteria. But, if you happen to be in one, flood insurance is a must.

  • Survey Fee: The lender may charge a fee for surveying the property to determine the physical property lines. This isn’t required in most areas of the country unless there are property line disputes or questions about property boundaries.

  • Attorney’s Fees: Attorneys can assist you in negotiating and interpreting the sales contract and help you close the deal faster. Not every state will require you to have an attorney, but if yours does it’s helpful to call around and find a local experienced real estate lawyer. 

Let's Summarize...

If you’re facing financial hardship there are options available to you as a civilian, active duty servicemember, or a veteran. One option is a debt consolidation loan. Borrowers who qualify for these loans can lump their debts in one monthly payment, sometimes at a lower interest rate.

Active duty servicemembers and veterans may qualify for special debt consolidation loans through the VA’s financial programs to get out of debt. One option is the VA’s Military Debt Consolidation loan. This loan lets you borrow cash against your home’s equity to get out of debt. It has pros and cons. Borrowers may be charged various costs and must meet eligibility requirements. But those who are eligible can save money and stop stressing over high-interest debt. Working with a credit counselor can help you figure out which debt relief option will work best for you to find financial peace of mind.

Written By:

Attorney Tori Bramble


Tori Bramble is a bankruptcy attorney with over 20 years of experience. She is licensed to practice in Maryland and Virginia and has helped over 1,500 clients discharge thousands of dollars and find debt relief by filing Chapter 7 or Chapter 13 bankruptcy. A New York native, Tori... read more about Attorney Tori Bramble

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