The SCRA 6 Percent Interest Cap

The rule almost nobody uses

If you took out a loan before you went on active duty, federal law caps the interest on it at 6 percent. Not as a courtesy. As a legal requirement.

And here is the part that costs veterans real money: it is not automatic, and your lender will not call to offer it.

The Consumer Financial Protection Bureau looked at how often eligible servicemembers actually get this reduction. Fewer than 10 percent of eligible auto loans and about 6 percent of eligible personal loans were getting it. That gap adds up to roughly ten million dollars a year that servicemembers were entitled to and never asked for.

Here is how the rule actually works.

The statute

It is 50 U.S.C. § 3937, part of the Servicemembers Civil Relief Act. If you have seen it cited as 50 U.S.C. App. § 527, that is the same rule under its old numbering.

It covers an obligation:

...bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember's spouse jointly, before the servicemember enters military service...

Three words in there do most of the work: before the servicemember enters military service.

This is a pre-service debt rule. The credit card you opened in college, the car you financed the year before you shipped, the mortgage you signed as a civilian. Those qualify. The loan you took out last month while on active duty does not.

The trap nobody warns you about

Refinancing or consolidating a pre-service debt during your service can destroy your eligibility.

Think about why. The protection attaches to an obligation incurred before service. When you refinance, you create a new obligation, and you create it during service. The new loan may not qualify even though the old one did.

If you are on active duty and someone is pitching you a refi or a consolidation on a pre-service loan, that is the moment to ask what you are giving up.

Six percent, and the excess is gone forever

This is the part people get wrong, including some lenders.

The interest above 6 percent is not deferred. It is not parked somewhere to be collected when you get out. It is forgiven. The statute says so in a subsection with that exact heading:

Forgiveness of interest in excess of 6 percent. Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the prohibition in paragraph (1) is forgiven.

And your payment has to come down. Under § 3937(a)(3), the lender must reduce the periodic payment by the amount of interest forgiven for that period. They cannot keep your payment the same and quietly re-amortize. They cannot balloon it at the end.

"Interest" is also broader than you would think. Under § 3937(d)(1), it includes service charges, renewal charges, fees, and any other charges connected to the debt. The only carve-out is bona fide insurance.

How long it lasts

For most debts, the cap runs during your period of military service.

For a mortgage, trust deed, or similar security interest, it runs during your service and one full year after. That extra year is in the statute at § 3937(a)(1)(A) and it is permanent.

How to invoke it

You have to ask, in writing. Send the lender:

• Written notice that you are requesting the 6 percent cap, and

• A copy of your military orders, or any other appropriate indicator of military service, including a certified letter from a commanding officer

That second option matters. Congress added it in 2018. A lot of guidance still floating around says orders are the only acceptable proof. That has not been true for years, and if a lender tells you otherwise, they are working from an outdated script.

The notice can be electronic. A message through the lender's portal counts.

The deadline is 180 days after you are released from military service. Miss that window and the claim is much harder.

It reaches backward, and further than you think

Once you give proper notice, § 3937(b)(2) requires the creditor to apply the cap effective as of the date you were called to military service.

Read that carefully. Not the date you reported. Not the date you started active duty. The date you were called.

For Guard and Reserve members that distinction is worth real money, because orders can arrive months before you actually go active. Every one of those months is covered.

You are also entitled to a refund of excess interest you already paid in that window.

The lender cannot just say no

A creditor does not get to decline this on its own.

Under § 3937(c), a lender who wants out of the cap has to go to court and persuade a judge that your ability to pay the higher rate is not materially affected by your military service. Until that happens, the cap applies.

So if a lender simply refuses your written request, they are not exercising a right. They are ignoring the statute.

One caution: lenders sometimes check a federal database called DMDC and tell you it shows you are not on active duty. DMDC only reports certain categories of service and misses many that qualify. A DMDC "no" does not defeat a properly documented request.

Guard and Reserve: read this part twice

The cap uses the term "military service," which is defined at 50 U.S.C. § 3911(2), not in § 3937 itself. Where you fall matters:

• Title 10 federal active duty qualifies, including training orders.

• Title 32 duty qualifies only in a narrow case: more than 30 consecutive days, called by the President or Secretary of Defense, responding to a Presidentially declared national emergency, and federally funded. All four conditions.

• State Active Duty generally does not qualify.

There is also a benefit hiding in the Guard and Reserve pattern of service. Debt you took on between eligible periods of active duty counts as pre-service debt for the next activation.

If you are Guard or Reserve, I wrote separately about filing bankruptcy while active duty, Guard, or Reserve, because the means test rules run on a similar and equally misunderstood set of definitions.

Where this fits with bankruptcy

The 6 percent cap is not bankruptcy. Sometimes it is enough on its own. A servicemember carrying pre-service debt at 24 percent who gets it dropped to 6 percent may find the math suddenly works.

But often it is one piece. If a garnishment is already running, if a judgment has been entered, if the debt is post-service anyway, the cap will not reach it. That is a different conversation, and the automatic stay is usually the tool.

The two are not in conflict. Invoke the cap on what it covers. Deal with the rest separately.

Frequently asked questions

Does the SCRA 6 percent cap apply to debt I took out after joining? No. It applies only to obligations incurred before you entered military service. A loan taken out during service is not covered, which is also why refinancing a pre-service loan during service can end your eligibility.

Is the extra interest forgiven or just postponed? Forgiven. 50 U.S.C. § 3937(a)(2) is titled "Forgiveness of interest in excess of 6 percent" and says the excess is forgiven. Your periodic payment must also be reduced accordingly under § 3937(a)(3).

Do I have to send my orders? Not necessarily. Since a 2018 amendment, you may send your orders or any other appropriate indicator of military service, including a certified letter from a commanding officer. Notice may be electronic.

How long do I have to request it? Not later than 180 days after your termination or release from military service.

How far back does it go? To the date you were called to military service, not the date you began active duty. For Guard and Reserve members those dates can be months apart, and you are entitled to a refund of excess interest paid in that period.

Can my lender refuse? Not unilaterally. Under § 3937(c), a creditor must obtain a court order finding that your ability to pay the higher rate is not materially affected by your military service.

Does it cover fees, or only interest? Both. Section 3937(d)(1) defines interest to include service charges, renewal charges, fees, and other charges. Bona fide insurance is excluded.

Does the cap apply to Guard members on state orders? Usually not. Title 32 duty qualifies only if it exceeds 30 consecutive days, is ordered by the President or Secretary of Defense in response to a Presidentially declared national emergency, and is federally funded. State Active Duty generally does not qualify.

Related reading for veterans

Can I file Chapter 7 if I receive VA disability? — the HAVEN Act and the means test.

Can they garnish my VA disability? — 38 U.S.C. § 5301 and the bank account trap.

Can I file bankruptcy while active duty, Guard, or Reserve? — the 540-day window.

Will filing bankruptcy cost me my security clearance? — what SEAD 4 Guideline F actually says.

Where Maryland veterans can get help with debt — the free options, with current numbers.

Talk to someone who knows this part of the law

If you are carrying pre-service debt at a rate that is eating you alive, the cap may be sitting there unused. It is worth fifteen minutes to find out what applies to you.

Sheereen E. McNair, Esq. · Middleton Legal · Greenbelt, Maryland. Call 240-896-3253. Free 15-minute consultation. You will talk to me.

We are a debt relief agency. We help people file for relief under the Bankruptcy Code.

This page is attorney advertising and general information about federal law. It is not legal advice for your situation, and reading it does not create an attorney-client relationship. Every case is different. Middleton Legal represents clients in Maryland.

Part of Middleton Legal's guide to Bankruptcy for Veterans and Military Families in Maryland.