VA Debt Consolidation for Veterans & Active Duty Military

Written by: Tom Jackson

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Nobody joins the military to get rich. They also don’t join it to get poor.

Unfortunately, that’s often how it turns out.

Studies show that almost 35% of service members can’t pay their bills on time. About 27% of them have more than $10,000 in credit card debt.

With inflation and the economic fallout of COVID-19, staying out of debt has become an everyday war for military families. There is a proven battle plan, however.

Debt consolidation loans and programs have helped millions of consumers. Simply put, high-interest debt like credit cards and payday loans are combined into one bill. It’s paid from a low-interest loan you get on your house.

Though your total debt doesn’t change, the reduced interest charge allows you to make a single monthly payment that’s lower than the combined bills you were previously on the hook for.

While debt consolidation has benefits for civilians, it has even more ways to help veterans and active-duty military members. Here are the basics:

What Is a Military Debt Consolidation Loan?

A Military Debt Consolidation Loan (MDCL) is also called a VA Consolidation Loan. It’s similar to other debt consolidation loans, except you must have a VA loan on your house.

An MDCL is considered a “cash out” loan. You refinance our current VA loan for more than the amount owed and take the difference in cash.

For instance, if you owed $75,000 on a house appraised at $100,000, you could take out a $100,000 loan. You have $25,000 in cash (minus closing costs) to pay off those high-interest credit cards and other debts.

One advantage over a civilian debt consolidation loan is that an MDCL is guaranteed by the VA. Such loans also typically have lower interest rates than non-military loans.

You should bear in mind that a MDCL turns unsecured debt like credit cards into secured debt. Your home is collateral, so you could lose it if you default.

Military Debt Consolidation Loan Benefits and Disadvantages

The possibility of foreclosure is one of the downsides of an MDCL, but there are plenty of plusses. Here are some things to consider.


  • Qualifying for an MDCL is easier than conventional consolidation loans.
  • There are lower credit-score and debt-to-income requirements.
  • Longer repayment terms.
  • No monthly mortgage insurance premiums.
  • No repayment penalties.
  • Allows you to more easily build your credit score.
  • Able to access DOD’s Homeowners Assistance Program (HAP).


  • Loss of equity in your home.
  • Risk of foreclosure if payments aren’t made.
  • Paying closing costs can lessen the expected gain from consolidating debt.

Do I Qualify for a Military Debt Consolidation Loan?

The biggest requirement is that you are a veteran or active-duty service member. That allows you to apply for a VA loan.

An MDCL is basically a second mortgage on your home. You must own a property and have equity in it, and you must demonstrate the ability to repay the loan. As with any mortgage, the lender will check your income, credit score, total debt and other factors.

Military & Veteran Consolidation Loan Options

MDCLs are typically used to pay off credit cards and other high-interest debts. Home loans have much lower interest rates, and VA rates are even lower than average consumers can get.

At the end of 2021, the average rate for a 30-year fixed mortgage was 2.72%. It was 2.99% for a conventional mortgage.

Consider that the average credit card interest rate was 17%, and that an MDCL can be paid off over 15, 20 or 30 years. That could significantly reduce your monthly debt burden.

There are other debt consolidation options to consider. As always, they have pros and cons.

  • Personal Loans: These are loans through banks, credit unions or online lenders, and they typically have higher interest rates than MDCLs.
  • Home Equity Loans: These are second mortgages in which you apply for a loan based on the equity you’ve built. If you owe $150,000 on a $250,000 loan, you can apply for up to $100,000. You get a lump sum and make monthly payments. But the average interest rate was over 6% in the first quarter of 2022, so you’d save more money with an MDCL.
  • Balance Transfer Cards: These offer 0% interest rates for an introductory period, usually 6-18 months. You transfer debt from other cards to the new ones. It’s a decent move, but only if you pay off the debt before the introductory period expires. That’s when the interest rate skyrockets.
  • Family or Friends: If you have a rich aunt or uncle, they might float you some cash. But many loans to family members or close acquaintances have gone sour and ruined relationships.

Debt Consolidation Tips for Service Members and Families

About 35% of veterans had trouble paying their bills in the first few years after leaving the military, according to a 2019 Pew Research study. Almost 30% received unemployment benefits, and 12% said they received government food benefits.

While an MDCL can help get you out of a financial hole, there are things you can do to avoid it in the first place.

Consolidate Before Deployment

The last thing a Ranger needs to think about before jumping out of a C-17 aircraft is “Hold on. Did I pay my Visa on time this month?” Even if you’re not in combat, dealing with bills is doubly difficult when you’re away from home.

Getting an MDCL before deployment lets you focus on your mission, not that pesky auto loan.

Request Reduced Interest Rates

Are you familiar with the Servicemembers Civil Relief Act? If not, you should bone up bit.

The legislation was updated in 2003, but its origins go back to the Civil War when Congress passed a moratorium on any civil legal action against Union soldiers and sailors during conflict.

The modernized SCRA reduces interest rates on credit cards and offers other discounts for deployed military personnel. The interest rate is capped at 6% but is automatically applied only to federal student loans.

It must be requested for other debts, though some creditors might offer even lower rates. Be sure to ask.

Set Payments Via Discretionary Allotments

This is basically a direct-withdrawal system, which further simplifies the monthly bill-paying rigamarole.

Military members on Extended Active Duty can arrange to have funds automatically taken from their pay and sent to designated people or businesses. They can have up to six allotments at a time, and a debt consolidation could be one of them.

Set Up Special Power of Attorney

This allows you to designate someone to manage your financial affairs while you’re deployed. Obviously, you want to make it a spouse or trusted advisor, not your bookie. That person will be able to change your allotments as needed.

Freeze Credit Cards

Once you consolidate debts into a single lower-interest payment, you don’t want to screw things up by adding new credit card debt at high interest rates.

Freeze your credit cards, including those other people can access through the power of attorney. Their role is to manage your bills, not make them larger.

Use Your Savings Deposit Program (SDP)

If you’re deployed to a combat zone, you’ll receive Hostile Fire Pay/Imminent Danger Pay and will be eligible for the Savings Deposit Program. It pays 10% interest. That’s probably less than you deserve for dodging enemy fire, but it beats almost any civilian saving program.

Since the money grows at 10% and interest rates on debts is 6%, you should dump all you can into an SDP. That will make it easier to pay down debt when your deployment ends.

Military Debt Consolidation Loan Closing Costs & Fees

Military personnel get certain breaks in the loan process, but there is no free lunch. Closing costs and other fees still apply.

The VA guarantees lenders 25% of a home’s purchase price if the borrower defaults. That money is generated by the VA Funding Fee, which is applied to every loan.

Rates range from 1.25% to 3.3%, depending on factors like the down payment size and your loan history. The fee doesn’t apply to military members with service-connected disabilities.

There’s also usually a 1% origination fee. That must be paid at closing and isn’t rolled into your loan, so you’ll have to come up with 1% of the loan.

The good news is if the lender charges the origination fee, it can’t charge you for escrow, underwriting, processing or mortgage-broker fees.

Other fees still might come into play, like credit reports, appraisals, discount points, document recording and real estate commissions.

Debt Consolidation Alternatives

A MDCL can bring a lot of debt relief, but it might not solve all the financial problems that come with military life. Fortunately, there are organizations dedicated to helping relieve the burden. You might consider programs offered by:

  • Air Force Aid Society
  • Coast Guard Mutual Assistance
  • American Legion
  • USA Cares
  • Army Emergency Relief
  • Disabled American Veterans
  • MilitaryOneSource

They are often staffed by people who are ex-military or have family members who served. They know how tough it can be live on a military budget.

Between their help and consolidation loans, you won’t get rich for having served your country. But at least you might not end up in the poorhouse.

» Learn More: Should You Pay Off Debt or Save for a House?

About The Author

Tom Jackson

Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.


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