Are you in need of emergency funds but have no immediate solution? You can borrow against your pension!
A pension is a set amount of monthly payments to retirees, replacing their monthly income. It comes from a pool of funds that an employer has contributed throughout the time an employee has been in employment.
Not all employers offer pensions, though. And the amount will depend on the contribution and the total years worked.
If you have a pension, you’re one of the luckier Americans who can still have a source of income after retiring. However, there may come a time when you need more than that amount.
Can you borrow against a pension? Yes, you can, but read this first to learn more about borrowing against your pension plans.
1. What Is a Pension Loan?
A pension advance loan is a type of loan geared towards retirees. Pension loan companies give you a lump sum in exchange for some or all your monthly pensions. Pension loans are a common alternative for retirees with bad credit because most don’t require a credit check.
If you look at it from a certain point of view, it looks like an advance withdrawal of your pension. What makes it different?
The difference would be the high interest rates charged by pension loan companies. As of the moment, no laws are regulating these loans, leading to high interest rates.
Many pension advance companies hide this by not disclosing the actual amount of the interest. Rather, they express it as a set of monthly payments. The borrower would only see the monthly payments, not the total amount they’re paying for and the amount associated with interest, fees, and other charges.
If you’re considering getting a pension loan, make sure to avoid such companies.
2. Be Careful When Borrowing Against Your Pension Credits
Many loans today are predatory; they take advantage of desperate people with bad credit, an immediate need for cash, or no financial literacy. If you’re taking out a pension loan among other things, make sure to watch out for these red flags.
High Interest Rates
The interest of pension loans can go as high as over 100% because of the lack of state and federal laws covering them. This is one of the reasons why borrowing against your pension benefits isn’t recommended. Other short-term loans are available with lower APR and lower risks, even for retirees.
Setting Up a New Bank Account
We have a law that says you can’t hand over your government pensions to a third-party. To circumvent this, some loan companies will need you to open a separate bank account. The control of this account goes to them.
If you have to set up a different bank account, stay away from this company. This is a sign they’re illegitimate, which means they’re going to prey on you as much as they can.
Signing Up for a Life Insurance Policy
If the loan company requires that you take out a life insurance policy to cover your loan if you die, that’s a major red flag. Decent companies won’t do this because the loans you take out from them will pass on to your estate. This ensures they still get paid for the loan they lent you.
Without government support, illegitimate companies will instead get you to sign an insurance policy. If you see something like this, make sure to reassess your decision to get a loan from such a company.
3. Consider Your Loan Purpose
Even if you’re careful about choosing the best pension loan company, you should think about it harder. What do you need it for anyway?
Your pension is a sure source of income after you retire. In many cases, it’s enough to sustain your lifestyle.
If you take out a loan against your pension, you’re going to lose that source of income. What happens after you’ve spent the lump sum and you still haven’t paid it back? You might get tempted to take out another loan, which will put you deeper in debt.
Only take out a pension loan when you’re sure you can still sustain yourself afterward. It’s a possible option for critical emergencies, like unexpected medical bills. Even so, explore your other options before going for a pension loan.
4. Other Alternatives to a Pension Loan
Even if you’re a retiree with bad credit, you may still have options other than a pension loan. Asking your friends and family members for a favor may work, especially if it’s for a true emergency.
This way, you won’t have to worry about high interest rates. It’s also easier to work out the repayment terms that will work with both parties.
The risk here involves your relationship with the lender. Being unable to pay might make you ruin your relationship with a friend or a relative. If they also need the cash in an emergency, you have to find ways to repay them in that instance.
Ask your bank and credit union first, as well, to make sure you’re not eligible for a short-term loan. If you are, then these are better options as they’re regulated by the law. Ask for their loan plans that may work in your favor.
A home equity loan or a reverse mortgage is also in the cards if you own your home. A cash advance on your credit card is also another option, but this should be far down on your list. The APR on cash advances are pretty steep, but at least you have the laws to protect you in case of exploitation.
Consult a financial expert to help you explore your options before you take out a pension advance loan. If you’ve exhausted all your options and a pension loan is the only one remaining, make sure you keep our warnings in mind.
Get the Right Pension Loan
Keep our tips about borrowing against your pension plans to protect your finances and the security of your life after retirement. If you need help, consult someone knowledgeable who might be able to point you to better options. They may also help you avoid predatory pension loans.
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