Military Lending Act

Military Lending Act (MLA) summary:

• The Military Lending Act caps interest rates on certain kinds of loans for military members, their spouses, and their dependents.

• Military members are also protected against prepayment penalties under the Act. 

• The Military Lending Act doesn’t apply to all loans.  

Military Lending Act definition and meaning

The Military Lending Act is a federal law that was implemented in 2006 to protect servicemembers and their families from certain lending practices. The Act applies to active-duty members of the military, their spouses, and their dependents. 

Under the Act, lenders are required to cap interest rates at 36% on certain types of loans. This rule doesn't extend to certain secured loans, including mortgages, home equity loans, and car loans. 

Key concept: The Military Lending Act is a federal law that offers lending protections to servicemembers.

More on the Military Lending Act

Servicemembers sometimes need to borrow like anyone else, and when you do, the Military Lending Act is there to protect you. This federal law is designed to curb predatory lending practices that target people in the military. Predatory means abusive and not good for the borrower.

Who does the Act apply to, and what does it do? Let's look at the details. 

Military Lending Act: a comprehensive breakdown

The Military Lending Act was enacted in 2006 to discourage unfair lending to military borrowers. It protects people who are:

• Serving on active duty (including those on active Guard or active Reserve duty)

• Spouses of active-duty service members

• Children of active-duty service members who are under the age of 21, or under the age of 23 and enrolled full-time at an approved school

• Children of active-duty servicemembers of any age who are mentally and/or physically unable to care for themselves

The Military Lending Act extends certain protections that relate specifically to loans and credit. The biggest protection is interest rate caps.

Under the Act, lenders must cap annual percentage rates (APRs) for eligible service members (and their families) at 36%. The rate cap applies to all the costs of the loan, including the interest rate, finance charges, and fees. 

Aside from that key benefit, the Act says that creditors can't require you to:

• Submit to mandatory arbitration or give up certain rights under state and federal laws

• Create a voluntary military allotment to get the loan

• Pay a prepayment penalty if you pay your loan back early

That's reassuring if you plan to apply for a loan, but there are some limitations. The Act applies to some types of loans but not others. 

What the Military Lending Act covers

Quite a few loans fall under the restrictions of the Military Lending Act. You're protected by the rules listed above if you plan to get any of the following:

• Certain student loans

• Unsecured installment loans (including personal loans)

• Payday loans

• Title loans

• Tax refund advance loans

• Cash advance loans

• Credit cards

So where does the Act draw the line? Secured loans aren't covered. A secured loan is any loan or line of credit that's tied to collateral, which is something of value that you own. Secured loans reduce risks for the lender, since the lender can keep your collateral if you don't pay. 

Secured loans that are NOT covered by the Military Lending Act include:

• A mortgage to buy a home

• Home equity loans

• HELOCs (home equity line of credit)

• Reverse mortgages

• Refinance mortgage loans

• Vehicle loans (that are secured by the vehicle you're buying)

• Secured personal loans

A 36% APR would be unusual for any of these loans, but possible. It's always a good idea to compare lenders to find the lowest rates that you qualify for. While you're checking rates, take a look at the loan terms and fees. 

Your loan term can influence your rate, monthly payment, and how much interest you pay overall. If you want to pay off your loan quickly and save on interest, you might choose a shorter term. On the other hand, a longer term loan, such as a 30-year HELOC, may fit better if you want the lowest payment.