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Some troops qualify for loan interest rate reductions

Sep. 17, 2007 - 10:40AM   |   Last Updated: Sep. 17, 2007 - 10:40AM  |  

Listen up. You've likely heard about the Servicemembers' Civil Relief Act, the law that provides protections for troops in a variety of ways, many of which apply to anyone who deploys.

But when it comes to the provision about reducing the interest rates on loans to 6 percent, the law is clear: It applies only to credit that is obtained before you entered active duty. This could be regular, full-time active service or mobilization in a reserve component.

And it pays to be aware of your rights before you start trying to put pressure on financial institutions.

Here are some examples:

• Let's say you're a firefighter who is also a reservist, and you take out a loan with a 10 percent interest rate. A year later, you get called to active duty. By law, the bank must reduce your interest rate to 6 percent. However, if the bank can show you are not "materially affected" by being called to active duty — that it does not adversely affect your ability to pay the debt — a court might rule that the bank does not have to reduce the rate to 6 percent. If you're making more money after being called up to active duty than you were as a firefighter, you might not get your rate reduced.

• Let's say you're a firefighter who is not a reservist, and you take out a loan for 10 percent. A year later, you decide to enlist in the military. By law, the bank must reduce your interest rate to 6 percent. But again, you must be "materially affected" by entering the military.

• Now, let's say you're an active-duty service member who has been in the military for 15 years, and you take out a loan for 10 percent after you've been in the service for 10 years. You deploy to Iraq. Does your bank have to reduce the interest rate to 6 percent when you deploy? No — you took out that loan after you entered the military.

One Navy chief petty officer wrote in an e-mail that when he deployed, his wife "began contacting our creditors to have the interest rate on our credit cards reduced to the 6 percent mandated by the Servicemembers' Civil Relief Act." He's been an active-duty chief for more than 16 years and incurred the debt after he entered active duty, his wife confirmed.

Thus, his creditors were not "mandated" to reduce the rate, as he contends. Even so, four of his creditors did agree to reduce his rate. Although not required by law, that's a great gesture of support for the troops.

But when one financial institution did not reduce the rate to 6 percent, as was its right, the chief complained to the Better Business Bureau, saying he was "greatly disappointed" in that institution.

Again, the financial institution did not violate the law. But the chief and his wife were adamant.

"If you are deployed to the war zone, they should do this for all active duty," his wife said.

The act aside, you certainly can ask your financial institution for a reduced interest rate on your credit cards on general principle — regardless of whether you're deployed. It's a good idea to ask, especially if you carry a balance.

Financial institutions will sometimes reduce the rate — and they might do it even if the customer is not in the military.

But invoking the act to reduce a loan rate when it doesn't apply to your situation may make it harder down the road for people who do qualify.

"If you're not entitled to the benefit, don't ask for it," said retired Air Force Reserve Col. John Odom, a Louisiana attorney specializing in SCRA issues. "It makes the creditor community suspicious" when someone asks for the benefit but isn't entitled to it, he said.

At one of his recent SCRA briefings for military attorneys, Odom said he urged them to counsel people about seeking benefits under SCRA only if they are entitled to them.

"The law is very clear," he said. "It is only applicable for those obligations that were incurred prior to military service."

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Got that? You're good to go.

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