Here’s what seniors need to know about taking out personal loans.
It’s an unfortunate fact that many older Americans find themselves strapped for cash during their old age. Part of the problem is that many retirees are not entitled to a pension (or at least not a large one) and have to live largely on Social Security benefits, which are not so generous.
It is true that some people enter retirement with a large sum of savings. But many of today’s retirees did not save for their golden years on their own, not least because the importance of doing so was not necessarily clearly established decades ago. As such, it is common for older people to find themselves in situations where they need money in a pinch.
Retirees who do not have cash reserves for a sudden expense may be tempted to take out a personal loan. But is it a good way to borrow in retirement? Here’s how to figure it out.
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The advantage of personal loans
Personal loans allow borrowers to take out a loan for any reason. And personal loan payments will not cause credit score damage as long as they are paid off on time each month. Plus, the interest that comes with a personal loan will usually be much lower than the interest on a credit card balance. In fact, it’s fair to say that retirees generally prefer to borrow through a personal loan rather than accumulating a credit card balance and paying it off over time.
But are personal loans safe for retirees? Well it depends.
Seniors who derive most or all of their income from Social Security tend to have very tight budgets. Thus, any retiree planning to take out a personal loan must first ensure that he will be able to cover his monthly payments on his existing income. This may or may not be possible, depending on the appearance of their Social Security checks.
Additionally, while it is possible for older people to increase their income by working part-time, those with health or mobility issues may not have this option. And so a personal loan is only really a safe bet in retirement if the borrower does some calculations and is sure to be able to make his payments every month.
There are also steps seniors can take to make borrowing with a personal loan less precarious. On the one hand, retirees should borrow as little as possible, even if they are entitled to a larger loan amount. The less money you borrow, the more manageable your monthly loan payments will be.
Additionally, seniors should check their credit scores before applying for a personal loan. It is possible to get approved with a lower credit score, but generally the lower the score, the higher the interest rate on a personal loan.
Should Seniors Rather Use Home Equity?
Many people manage to pay for their homes on time for retirement. Any senior who owns a home may find it easier to qualify for a home equity loan than a personal loan. Home equity loans are less dependent on credit scores and more on the amount of equity a homeowner has accumulated.
From an interest rate perspective, a home equity loan may be more affordable than a personal loan. But there is a risk of borrowing against your home in retirement: Seniors who don’t make their payments could risk losing their home.
Personal loans, on the other hand, are not secured loans meaning that there are no specific assets backing them up. While there are consequences of delaying a personal loan, such as damage to your credit score, the loss of your home is not one of them.
The bottom line is that personal loans can be safe for retirees as long as borrowers make sure they can manage their payments. Otherwise, it’s a dangerous bet. And this is true for older workers as well as for workers.