Here’s what seniors need to know about taking out personal loans.
It is an unfortunate fact that many older Americans find themselves strapped for cash during their senior years. Part of the problem is that many retirees don’t qualify for a pension (or at least not a hefty one) and have to live largely on not-so-generous Social Security benefits.
It is true that some people retire with a lot of savings. But many of today’s retirees didn’t save for their golden years on their own, not least because the importance of doing so wasn’t necessarily clear a few decades ago. As such, it is common for seniors to find themselves in situations where they need money at a moment’s notice.
Retirees who don’t have a cash reserve 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 that out.
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The benefits of personal loans
Personal loans allow borrowers to take out a loan for any reason. And personal loan repayments won’t cause credit rating damage as long as they’re repaid on time each month. In addition, the interest associated with a personal loan will generally be much lower than the interest on a credit card balance. In fact, it’s fair to say that it’s generally better for retirees to borrow through a personal loan than to build up a credit card balance and pay it off over time.
But are personal loans safe for retirees? Well, that depends.
Seniors who derive most or all of their income from Social Security typically have very tight budgets. Thus, any retiree considering taking out a personal loan must first ensure that they will be able to cover their monthly payments on their existing income. This may or may not be possible, depending on the appearance of their social security checks.
Also, while it is possible for seniors to supplement 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 a less precarious prospect. On the one hand, retirees should borrow as little as possible, even if they qualify for a larger loan amount. The less money you borrow, the more manageable those monthly loan payments will be.
Also, seniors should check their credit scores before applying for a personal loan. It’s 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 tap into the equity in their homes instead?
Many people manage to pay off their house in time for retirement. Any senior who owns a home may have an easier time qualifying for a home equity loan than a personal loan. Home equity loans depend less on credit scores and more on the amount of equity the homeowner has accumulated.
From an interest rate perspective, a home equity loan can be more affordable than a personal loan. But there’s a risk of borrowing against your home in retirement: Older people who don’t meet their payments could risk losing their homes.
Personal loans, on the other hand, are not secured loans, which means that there are no specific assets backing them. While there was are consequences of falling behind on a personal loan, such as damage to credit score, losing 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 that goes for seniors as well as working people.
The Ascent’s Best Personal Loans for 2021
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.