A greeting card shows a traffic cop stopping a driver who is wearing a shirt that reads, “Don’t Hassle Me! I’m Retired!”
Says the officer, “Whoa. Didn’t see the shirt. Sorry to bother you, Sir.”
If only retirement were so stress-free.
The promise of financial stability in the absence (hopefully) of soaring tuition costs and super-sized mortgages is too often sabotaged when a senior’s fixed income gives ground under the strain of inflation or medical emergencies.
The average Social Security retirement benefit is $1,625 per month. Social Security represents 90% of income for one in five seniors.
That payment can’t keep pace with expenses and debt for some retirees, even after SSN cost-of-living increases. Many may find themselves wondering, ‘How can I qualify for a loan if I’m retired?”
Statistics from the Survey of Consumer Finances showed the percentage of households headed by people 65 or older who carried debt increased to 61% in 2016. Median debt for those households was $31,300, more than double what it was just 15 years earlier.
Carrying some debt might be inevitable but it is especially daunting for seniors with bad credit. With the sharp increase in interest rates, it’s not getting any easier for many people.
“Debt in retirement does not have to be a bad thing,” said Herman (Tommy) Thompson Jr., Certified Financial Planner with Innovative Financial Group in Atlanta. “If a senior has a strong income from sources like Social Security, pensions and/or annuities, debt is just a means for accessing future cash flow today.”
But Thompson acknowledges that doesn’t apply to some seniors. For those retirees, he says, “there are a number of resources available online for consumers with credit issues, but it can be difficult to know who to trust.”
Best Loan Options for Seniors with Bad Credit
In referencing the available resources, Thompson mentions nonprofit credit counseling chief among them. With the many options for seniors in debt – debt consolidation loans, personal loans, home equity loans or lines of credit, reverse mortgages, cash-out refinancing, auto loans, modifying student loans, USDA Housing Repair Loans and Grants – eligibility can vary based on a number of factors including credit score.
1. Debt Consolidation Loan
Think of a debt consolidation loan as a form of refinancing. If you’re carrying debt on multiple credit cards, for instance, a debt consolidation loan allows you to pay off those cards at a lower interest rate.
Debt consolidation loans often come with loan origination fees and work best when your credit score is above 670 and you get your spending under control.
2. Personal Loans
Personal loans are often an option for people hit with an unexpected major repair bill or a medical emergency. Banks, credit unions and online lenders all offer personal loans – some with more financial caveats than others.
There are a few things to keep in mind when considering a personal loan:
- Online lenders have streamlined the process but generally have higher interest rates.
- The APR, the annual interest you’ll pay on your personal loan balance, will depend on your credit score. A poor credit score could be the difference between a 10% APR and 30% APR.
- If your credit is poor, lenders may require you to put up collateral. While such a secured loan has friendlier terms than an unsecured term, you could lose valuable assets if you fail to make payments.
“A senior should exercise caution when taking a protected asset and exposing it to creditors,” Thompson said.
3. Home Equity Loan or Line of Credit (HELOC)
A home equity loan allows you to borrow against the equity in your home, provided you qualify based on the amount of equity, your credit score and income.
You could tap into that equity either through a home equity loan or a HELOC (home equity line of credit.) The advantage of a HELOC with bad credit or if you’re stretched thin, is you only pay interest on the amount used in the line of credit whereas you’d pay interest on the entire amount of your home equity loan.
Thompson warns against exposing your home as collateral but says “many states provide bankruptcy protections for your primary residence.” Also, Medicaid provides exemptions for your primary residence when calculating needs based on eligibility.
4. Reverse Mortgage
Reverse mortgages offer seniors of a certain age (at least 62) to borrow against the equity they’ve built in their homes. You can take that amount in a lump sum, in fixed installments or as a line of credit.
The difference between reverse mortgages and more traditional home loans is no payment is due on reverse mortgages until you either sell your house or die.
While reverse mortgages have grown in popularity in recent years, high fees and associated costs continue to scare some people away. Financial experts warn that reverse mortgages should be taken with a specific need in mind – such as paying for long-term health care insurance for instance – versus using a reverse mortgage loan for an investment opportunity that may not pay off.
5. Cash-Out Refinance
Cash-out refinancing is self-explanatory. It gives you a new home loan for more than what you owe on your house. You get the difference in the two in cash at closing to pay down other debt, do home improvements or address other needs.
Keep in mind that cash-out refinancing likely will cost you more in closing costs than a home-equity loan or HELOC. But it can make sense if you get a good interest rate and use the money for something that builds equity in your home (a major renovation) or paying off high interest credit cards as opposed to using it for that trip around the world you always promised yourself.
6. USDA Housing Repair Loans and Grants
USDA housing repair loans are specialized lending for low-income homeowners whose household incomes don’t exceed 50% of the area median income. They are earmarked for owners of properties located in rural areas to repair or modernize their homes.
Loans are typically available up to $20,000 at a fixed percentage rate of 1% for up to 20 years. Grants have a cap of $7,500 and must be repaid if the property is sold in less than three years.
7. Auto Loan
This type of loan works best if you don’t need a large sum of money. The downside: if you don’t keep up your payments you run the risk of losing your transportation.
Auto loans have higher fees and interest rates and may only cover up to half of the car value.
8. Modify Student Loans
One (mostly) untold story of debt in America is how many people carry student loans well into their professional lives and, sometimes, even into their retirement years.
As of 2016, nearly 10% of families headed by someone age 50-plus carried student loan debt. The average debt of $33,053, tripled over the previous 15 years, according to the AARP.
Student loan consolidation and refinancing is an option for dealing with that debt. Remember, student loan debt can’t be discharged in bankruptcy and up to 15% of your social security payment can be garnished to pay off student debt.
Riskier Loan Alternatives for Seniors with Bad Credit
Bad credit can be a domino that triggers desperate measures. For people in need of a quick loan, that can lead to some alternatives that carry much higher risks than the options listed above.
Alternatives such as credit card cash advances and payday loans should be approached with the kind of caution you’d use at a busy intersection in a school zone.
Credit Card Cash Advance
If credit card debt is part of the reason you’re struggling financially, a credit card cash advance could be the equivalent of the frying pan-fire analogy.
A credit card cash advance is fast and easy – certainly much faster than easier than a cash-out home refinancing. But interest rates are high and you’ll pay extra fees. Since loan amounts are capped, it’s a lot to pay for a little help.
Payday Loans
You can qualify for a payday loan without a full-time income but you’re basically borrowing against your social security payment if that’s your main income staple.
You should consider a payday loan only in an emergency. And give it a ton of thought even then. Interest rates are typically exorbitant – 399% on the average payday loan! – and the repayment period is short.
Fees on top of high interest rates could compromise your chances of repaying it on time. And if you default on a payday loan, there goes your already damaged credit score.
SSI Loans
Supplemental Security Income is a program administered by Social Security that pays benefits to people with limited income and resources who are disabled, blind or age 65 or older.
Unlike Social Security payments, SSI is not based on previous earnings. SSI loans can be risky in that they could impact future benefits. Why? Because there’s a “limited resources” qualification, the loan amount could easily exceed those limited allowances. At that point, an individual or couple could find themselves ineligible for their monthly SSI payment.
Qualifying for Loans in Retirement
For the majority of seniors, their social security check is only one of their income sources that can be utilized in qualifying and securing a loan.
Pensions, investment income, spousal death benefits, retirement accounts and annuities are all counted as income if and when you need to secure a loan.
Explore loan options carefully. If at all possible, avoid loans with balloon payments and short repayment periods.
Keep in mind that if you miss payments on any loan, it can adversely affect your credit score and that can cost you thousands of dollars in future interest rates.
If you’ve been part of the same community for years, even better if you have been with the same bank for years, Thompson recommends your exploration start there.
“A local banker will typically take meetings-face-to-face,” Thompson said. “Local bankers (often) have access to a variety of debt instruments and usually have experience with credit repair and counseling.”
Working with a Nonprofit Credit Counselor
Thompson also mentioned nonprofit credit counseling for seniors dealing with debt, specifically citing the credit education aspect of counseling as a chief benefit. After all, even a small improvement in credit score can mean saving thousands of dollars.
The nonprofit credit counselors at InCharge Debt Solutions routinely help people get a handle on their debt in a free, 30-minute consultation that provides a budget review, debt analysis and recommendations for how to manage money and build credit scores.
Nonprofit credit counseling can help seniors qualify for a loan and get their retirement back on track.
Just as importantly, nonprofit credit counseling can deliver peace of mind for people whose goal all through their working lives, after all, was to eventually leave stress behind and enjoy their retirements.
