.png)
I need more money but I’m retired. Can I qualify for any loans?
There are all sorts of reasons older adults might need or want a loan: repairs and maintenance on their home, medical expenses, and helping adult children with tuition or a down payment on a home of their own are just a few examples. Some of these expenses are infrequent but regular; some may be one-time or ongoing. But if you’re on a fixed income in retirement, you don’t always have access to more money when you need it.
The good news is that being retired or older doesn’t mean you can’t qualify for a loan (it’s actually illegal to deny you based on age!) The trick is figuring out which loan is right for your circumstances. In this article, we’ll walk through the different types of loans available to seniors. But before you start looking at interest rates, you need to know the answers to a few questions:
- How much money do you need? (What do you need the funds for?)
- How long do you need it for? (When will you be best able to pay back the loan?)
- How quickly do you need the loan?
- How will you repay the loan?
Once you have the answers to these questions, you’ll be able to determine which type of loan will work best for you.
Secured or unsecured?
Broadly speaking, there are two types of loans: secured and unsecured. A secured loan is one in which the borrower puts up collateral, like a house or a car, to guarantee the loan. That means that if the borrower cannot pay the loan back according to the terms of the loan agreement, the lender takes the collateral instead. An unsecured loan is one in which the borrower doesn’t have to put up any collateral. Because the lender is taking a greater risk that they might not recoup the amount of the loan, unsecured loans tend to have higher interest rates and are harder to get.
The upside of these loans for the borrower, of course, is that they don’t risk losing other assets if they can’t repay the loan. Later in the article, we’ll note whether the loans discussed are secured or unsecured, so it’s good to keep that in mind when looking at your options.
What kind of loans are available to seniors?
With the exception of products like reverse mortgages, which are available only to folks 62 and older, the types of loans for seniors are the same types of loans available to younger adults.
The main difference is in applying for a loan because, as a retiree, you probably don’t have a salary coming in, though you do have income. That difference affects how lenders assess their risk in lending you money, and in how you plan on repaying the loan.
Also, it’s important to note that discriminating based on older age is illegal. The Equal Opportunity Credit Act prohibits lenders from discriminating based on age or the type of income you receive.
What criteria do lenders evaluate?
Generally, lenders look at the same criteria for older borrowers as they do for younger ones: income, assets, and credit. Creditworthiness is generally in an older borrowers’ favor, as they’ve been building up credit longer. Income is the criterion mostly likely to deter a lender from offering a loan to an older borrower. Because many seniors are fully or partially retired, their only significant source of income may be funds from a retirement plan and/or Social Security, and this income may not be enough to qualify them for a loan. If a significant source of income is set to expire before the term of the loan, lenders may legally deny an application. Another concern is that whatever funds retirees have, that money must last for an unknown stretch of time.
However, lenders can also determine whether or not you’re a good loan risk by assessing monthly income using asset depletion or using drawdown on assets. The lender then adds that amount to any pension or annuity income, Social Security benefits, and part-time employment income.
In asset depletion, the lender looks at the total value of your financial assets, subtracts any down payment on the loan, calculates 70% of the remainder and divides it by 36 months. A drawdown on assets simply counts regular monthly withdrawals from retirement accounts as income. If you’re not yet taking regular withdrawals from your retirement accounts, you can choose to set up monthly payments until the loan is approved.
What types of loans are available to seniors?
There are a number of loans available to seniors. Determining which one makes sense for you depends on your individual circumstances, including whether or not you own a home, and how you’ll be using the funds from the loan.
Personal loans or lines of credit are available from banks, credit unions, and online lenders. These unsecured loans can be good options for folks with particularly good credit.
There are a variety of financial products that use your home as collateral. That means that you get money in exchange for how much of your home you own, so, depending on the product, you have to have a minimum of anywhere from 20% to 50% equity in your home.
Home equity loans, also known as second mortgages, use your home as collateral in exchange for a lump sum payment, which you repay with interest over a set period of time.
Reverse mortgages are a special type of home loan designed for Americans 62 years of age and over. They require significant equity in the home but can be a good option for those planning to stay in their home for as long as possible and don’t need all their cash at once. Reverse mortgages are complex financial products, and it’s especially important to understand your options and how a reverse mortgage works before taking one out. Learn more about reverse mortgages.
A cash-out refinance loan is different from a second mortgage in that it pays off your existing mortgage and allows you to take out more money with one onging payment. Thus, a cash-out refinance is a new loan with different terms.
A home equity line of credit (HELOC) is a time-limited line of revolving credit using your home as collateral, paid back over time. The term of a HELOC is usually five to 10 years, during which the borrower only makes payments on the interest rate. HELOCs can be a good choice if you need a large sum of cash in a lump sum. Learn more about HELOCs.
If you need cash to perform maintenance or repairs on your home, and you live in an eligible rural area, you might qualify for a USDA Housing Repair Loan, also known as the Section 504 Home Repair Program. This loan is designed for very low-income homeowners to repair, improve, or modernize their homes and for very low income elderly homeowners to renovate their homes to remove health hazards and safety hazards.
Bridge loans are another short-term loan alternative. They tend to have higher interest rates (than HELOCs, for example) and origination fees, and usually require collateral, like significant home equity.
What loans can I get if I have bad credit?
If you have a poor credit score, there are still some options. But it’s important to be especially cautious with these loans, as many of them can quickly get you into financial hot water.
Perhaps the safest option for folks with bad credit, if they have any savings, is to take a share-secured or passbook loan from their bank or credit union. In order to take out one of these loans, you must have a CD or savings account at the bank or credit union. These loans have better interest rates than many of the other options for those with bad credit, because the lender uses your own money (the money in the savings or CD account) as collateral. (You’re essentially borrowing from yourself.) Your account still earns interest on the total in the account, but there can be fees on late payments and if you default on the loan, you can lose the money in your account to pay back the debt.
Payday alternative loans (PALS) are offered by some federal credit unions. They are, as you might expect, designed to be an alternative to payday and installment loans, which typically have very poor terms for their borrowers. PALS I and PALS II loans are small-dollar, short-term loans of up to six months and one year, respectively, with interest rates capped at 28%. Learn more about PALS loans.
Car loans, in which the lender uses your vehicle as collateral, are available from banks, credit unions, and online lenders. There are two types of car loans, auto equity and title loans. If you default on either of these, the lender can repossess your car to pay off your debt. Auto equity loans are likely to have longer terms and lower interest rates than title loans, which are usually 15 to 30 days and can have interest rates of 300% APR. Title loans usually allow individuals to take smaller loans.
Cash advance apps can offer advances on retirement income and work as an alternative to payday loans, as they don’t charge interest. They do, however, charge a monthly membership fee and may charge other fees as well, which can add up quickly. These loans are generally for very small amounts—$50 to $500—so they won’t help if you need money for health care, home repairs, or something similar.
In addition to the above options, there are a number of loan types that experts advise folks to avoid, including payday loans, cash advances from credit cards, and securities-backed lines of credit. The first two types of loans are notorious for having sky-high interest rates. Securities-backed lines of credit allow folks with investments to get a loan of 50% to 95% of the value of their investment portfolio. They can seem attractive as the interest rate may be low, but they are a gamble. If the market crashes, borrowers can be on the hook for the loan amount in as little as 24 hours.
Should I borrow from my retirement plan?
Generally, experts advise heavily against borrowing from your retirement accounts unless you know you can pay it back in full. While the cost of a retirement account loan is likely to be lower than a personal loan, there are two major drawbacks. Until you repay the loan, you miss out on the compound interest of those funds and what you would have earned from any market gains. Particularly, if you’re already in retirement, it’s important to consider how you’ll be repaying the loan.
All in all, if you’re considering borrowing against an IRA or 401k plan, make sure you understand all of the penalties or drawbacks of your specific fund. Here is an article from Investopedia that goes into the details of borrowing from IRAs and one from Bankrate looking at 401ks.
So, what is the best loan for seniors?
The answer depends on your particular circumstances. For longer-term, large-sum loans, those that use home equity are often the best option. The most important thing is to understand your own circumstances and the terms of any loan you’re considering, including a repayment plan.
If you’re looking for cash to help pay for your or a loved one’s health care needs, Wellahead can help you review your options, empowering you to make the best financial decision for your unique circumstances. The service is always free-of-charge. Talk to a Wellahead Concierge today by calling or texting 919-230-2599.
