WRITTEN BY: LAUREN WARD
What Are Retiree Loans?
A retiree loan is any type of loan, such as a personal loan, home equity loan, or debt consolidation loan, taken out by someone who has retired from the workforce. Though people who are retired often assume they won’t be able to qualify for financing, that’s not necessarily true. As long as you have good credit and a steady source of income — whether it’s through assets, a part-time job, or retirement benefits — you may qualify for a loan.
There are many reasons to apply for a personal loan as a retiree. Some of these may include the following.
1. Home renovations
Once officially retired, many people choose to tackle home projects they had once put off. Whether it’s a simple home renovation, an addition, or finally taking care of deferred maintenance, a personal loan can help make big projects possible.
2. Debt Consolidation
It may be a smart move to consolidate your debts with a personal loan. If the interest rate is lower, you may be able to afford a more aggressive payoff strategy so your debts don’t affect any inheritance you leave your beneficiaries.
Retirement can be the perfect time to travel the world because you no longer have the same time restrictions. You can likely choose when to leave and when to come back. You might consider using a personal loan to fund a trip rather than dipping into your nest egg.
Oftentimes, retirees choose to take out loans as a gift for a family member. You might take out a loan, for example, to help an adult child purchase their first home or help pay for a family member’s wedding.
Yes, a retiree can often cosign a loan. The lender will likely want to see that you have strong credit and a source of income that can easily cover the loan payments should the main borrower default on the loan.
Common Loans for Retired Individuals
As long as you meet the lender’s eligibility requirements, you will be able to choose from a variety of retirement loans. Here are some of the most common loans for retirees.
1. Home Equity Loan
The type of loan is based on borrowing against the equity you’ve built up in your home. The loan is secured by your property and can be used to consolidate debt or pay for large expenses, such as home improvements or medical expenses. You typically need to have good credit and at least 15% to 20% equity in your home. You may be able to borrow 75% and 85% of your equity.
2. Reverse Mortgage Loan
If you are 62 or older and have considerable home equity, you may be able to get a reverse mortgage. This allows a homeowner to borrow against the value of their home and get a lump sum or fixed monthly payment. The loan is not paid back until the homeowner dies or moves out of the home. If the loan balance becomes larger than the home’s value, the homeowner or their heirs won’t be held responsible for paying the difference.
3. Debt Consolidation Loan
A debt consolidation loan allows borrowers to refinance their existing debt. The benefit is that you can consolidate several payments into one monthly payment. However, this may mean you will be paying off the debt longer, especially if payments are lower. Also keep in mind that the interest rate may or may not be lower than the rate on your current debt.
4. Personal Loan
Personal loans are a popular loan because you can use the money for just about anything you want. There are some other benefits of personal loans, such as fixed payment terms and interest rates that may be lower than credit cards. You may also have the option to get an unsecured personal loan, meaning you wouldn’t have to put up any collateral to secure it, though the interest rate may be higher.
5. Payday Loan
Payday loans are available to virtually anyone, including retirees. These are secured or unsecured short-term loans. One option that can appeal to retirees is the Social Security payday loan, which is given on an agreement with the borrower that they will pay back the loan amount by their next social security payment date. Payday loans can be handy in an emergency, but they typically come with very high interest rates and fees.
Personal Loan for Senior Citizens Requirements
The requirements for getting a loan as a senior citizen are similar to anyone else applying for a loan. Here is what lenders typically look at when approving an older borrower for a personal loan.
- Your age (some lenders have a cut-off point of 75)
- Strong credit score (ideally in the 670-739 range)
- Low debt-to-income ratio (more on that below)
- Steady source of income (from part-time work, rental income, Social Security, pension, and/or investments)
- Sufficient collateral, or assets (needed for a secured loan)
Personal loan rates will depend on all the above criteria, as well as the lender.
How Lenders View Retirement Income
When you work for a company, it’s easy to prove your income by showing your tax returns, a pay stub, or a W-2. When you’re retired, it can be a bit more complicated — especially if you have multiple income streams.
Luckily, lenders understand this, and allow borrowers to combine all sources of income to prove they are able pay back a debt. If your Social Security and pension income isn’t sufficient for you to qualify for a loan, you may be able to set up regular monthly withdrawals from retirement funds or investments that the lender will count as income.
1. Fixed Income
Lenders will typically consider any of the following as income. However, for some types, you must be able to prove you will continue to receive payments for the duration of the repayment period:
- Annuity Income
- Income from investments
- Social Security benefits
- Spousal or survivor’s benefits
- Monthly retirement withdrawals
- Regular payments form investment accounts
2. Debt-To-Income Ratio
Because many retirees have lower incomes than when they were working, lenders may look more closely at debt-to-income (DTI) than they would otherwise. Your DTI ratio is a formula that looks at the percentage of your monthly income that goes toward debt. Lenders usually look at your DTI ratio as a percentage.
You can calculate your DTI ratio by dividing your recurring minimum debt expenses by your total monthly income. First, add up all of your monthly debts, keeping in mind that utility bills, rent, subscriptions, and internet/ cable bills don’t count. This might include:
- Credit card bills
- Student loans
- Personal loans
- Auto loans
Next, you divide that number by your gross monthly income (the amount you make before taxes). Multiply the quotient by 100 and you have your DTI. Example: Each month you have a $200 minimum on your credit card bill and a $300 car loan payment. You receive $1,700 a month through Social Security benefits. Your DTI is, therefore, 29%. Lenders have different DTI requirements, but, generally, if you have a DTI ratio higher than 50%, you might have a difficult time finding a loan.
You can lower your DTI ratio by picking up part-time work or by paying down some of your smaller debts before you apply for a loan. It might also help to add your spouse or partner to your loan to increase your household income.
3. Credit Score
Your credit score is a three-digit number that represents your reliability as a borrower. Lenders work with a variety of credit scores (from poor to excellent), but you’ll have an easier time getting approved if you have a strong score. Plus, if you have a strong score, you’ll likely receive a lower interest rate.
If you don’t know what your score is, it’s easy to find out. Many major credit card companies and some auto loan companies have begun to provide credit scores for all their customers on a monthly basis. The score is usually listed on your monthly statement or can be found by logging in to your account online. You can also get your score by using a credit score service (which may or may not charge a fee) or by ordering your scores from www.myfico.com (for a fee).
If your score is low, you may be able to boost your credit profile over time by paying your bills on time, lowering your DTI, and limiting hard credit inquiries.
Borrowing money in retirement is not as difficult as it used to be. Many lenders will look at a variety of income streams, and even have ways of treating a retiree’s assets as income.
Secured loans, which require collateral, are available to retirees and include home equity loans and reverse mortgages. You may also qualify for a personal loan, which can be used to pay for travel, a home renovation, or consolidate other debt.