This article by Karen Jowers originally appeared on Military Times, the nation's largest independent newsroom dedicated to covering the military and veteran community.

At a time when interest rates are rising dramatically, a new report shows that Guard and reserve members — and some active duty troops — are missing out on hundreds of dollars of interest rate savings, on average, under credit protections provided in federal law.

Guard and reserve members called to active duty may be paying an extra $9 million a year in interest, based on an analysis conducted by researchers at the Consumer Financial Protection Bureau. All told, over the 11-year period between 2007 and 2018, service members may have lost out on $100 million in savings on interest rate reductions on auto and personal loans, researchers found.

Researchers estimate that fewer than one in 10 Guard and reserve members with eligible auto loans, and 6% of those with personal loans, received an interest rate reduction to 6% during their activation period. They outlined some steps to take to increase the use of their rights under the Servicemembers Civil Relief Act.

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Under the SCRA, service members can request an interest rate reduction to a maximum of 6% on loans that were made before they entered active duty. Loans taken out during any term of active duty aren’t eligible for the interest rate reduction. This provision pertains primarily to Guard and reserve members, although it does apply to active duty members who took out loans before they entered the military.

“In a rising interest rate environment, these low utilization rates are particularly concerning,” said Thomas Feltner, senior engagement and policy fellow at the Consumer Financial Protection Bureau, in a statement to Military Times. The SCRA interest rate reduction benefit could provide many service members with substantial savings on eligible loans, he said.

“In the coming months and years, we expect to see the number of service members with pre-service loans that exceed 6% increase. If they are unlikely to receive an interest rate reduction, as this report suggests, the number of eligible service members missing out on critical interest rate relief may increase,” Feltner said.

Service members must request the interest rate reduction in writing from their financial institution; in most cases the lender doesn’t proactively apply the interest rate reduction. Service members can ask for the reduction at any time during active duty and up to 180 days after release from active duty. It also applies retroactively to the beginning of the activation.

In the near term, CFPB officials urge service members to contact their creditors early to make sure they receive the interest rate reduction they have earned, the spokesman said. “We also urge creditors to be proactive in identifying service members on active duty and apply the interest rate reduction automatically where possible.”

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Guard and reserve members are more likely to get a reduced interest rate during longer periods of activation, researchers found. But even for those activated for about a year or more, the likelihood of getting the reduction is less than 16% for auto and personal loans.

The bit of good news in the report is that Guard and reserve members are less likely to experience a repossession of a vehicle during a period of activation — about two-thirds less likely, compared to periods when they aren’t activated.

The researchers identified 23,736 people with loans who were activated as Guard or reserve members between 2007 and 2018. They matched data from the Defense Manpower Data Center’s SCRA website to the CFPB’s Consumer Credit Panel data. That credit data is a statistically representative sample of credit records purchased from one of the national credit reporting agencies.

Based on that data, researchers extrapolated that in the total Guard and reserve population, there may have been nearly 234,000 periods of activation where people had auto loans. During each activation period it’s estimated that the borrower paid an average $331 in excess interest, resulting in an estimated $77 million in excess interest across the population of Guard and reserve borrowers. The average interest rate was 11.3% and the average loan balance was $13,026.

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Researchers extrapolated that in the total Guard and reserve population, there may have been nearly 96,000 periods of activation where people had personal loans. During each activation period it’s estimated that the borrower paid an average $249 in excess interest, for a total of $24 million in estimated excess interest across the population of Guard and reserve borrowers. The average interest rate was 14.4%, and the average loan balance was $8,562.

The researchers didn’t provide estimates for lost savings on mortgages and credit cards, which are also eligible for interest rate reductions. They were unable to use the same methods to determine those interest rates. But they did find evidence that while Guard and reserve members may be receiving interest rate reductions, those reductions are infrequent.

Researchers provided an example of the potential savings for a service member who receives an interest rate reduction for a mortgage with an outstanding balance of $168,000, with an interest rate of 7.5%. Using a period of activation of 15 months — plus 12 months, because the benefit for mortgages extends to 12 months after activation — the savings would be $5,670 by reducing the interest rate to 6%, researchers stated.

“While the 30-year fixed mortgage rate rarely climbed over 6% during the observation window of this report, rates have risen sharply in 2022 to the highest level in 20 years,” researchers stated. “With the average 30-year fixed mortgage rates surpassing 7% in October 2022, the SCRA interest rate reduction benefit could provide many activated members of the reserve component with substantial savings.”

Recommendations to increase use of SCRA benefits:

• Financial institutions should apply the interest rate reduction to all accounts at that institution if a service member requests it for a single account.
• Explore ways to automatically apply the SCRA interest rate reduction. “Public and private sector resources should be aligned to increase adoption of an automatic application process,” researchers recommended.
• Develop a comprehensive and periodic review of the usage of the SCRA rate-reduction benefit.

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