It is an unfortunate fact that many older Americans turn off cash in their senior years. Part of the problem is that many retirees are not eligible for a pension (or at least not much) and have to live on a large amount of Social Security benefits, which they are not generous with.
It’s true that some people enter retirement with a nice heap of savings. But many of today’s retirees haven’t saved their own golden years, as the importance of doing so was not made clear a few decades ago. Thus, it is common for seniors to run into situations where they need a pinch of money.
Retirees who do not have cash reserves for sudden expenses may be tempted to take out personal loans. But is this a good way to get a loan during retirement? Here’s how to remove it.
Reversal of personal debt
Personal loans allow borrowers to borrow for any reason. And personal loan payments won’t hurt the credit score as long as they repay on a monthly schedule. Furthermore, the interest that comes with a personal loan will usually be much lower than the interest on a credit card balance. In fact, it is fair to say that it is better for retirees to take out a loan with a personal loan than to pay off their credit card balance and repay it over time.
But is personal debt safe for retirees? Well, it depends.
Seniors who get most or all of their income from Social Security generally have a much lower budget. Therefore, any retiree taking out a personal loan should first ensure that they can cover their monthly payments on their existing income. Whether or not this is possible depends on what their social security checks look like.
Also, while seniors can increase their income by working part-time, this may not be an option for those with health or mobility issues. And so if the borrower is reducing some numbers and making sure they can make their payments each month, then a personal loan is really a safe bet for retirement.
Seniors can take steps to reduce the likelihood of borrowing with a personal loan. For one thing, retirees should borrow as little as possible, even if they are eligible for a higher loan amount. The less money borrowed, the more manageable the monthly loan payments will be.
Also, seniors should check their credit score before applying for a personal loan. It is possible to get approved with a low credit score, but in general, the lower the score, the higher the interest rate on personal loans.
Should seniors use their home equity instead?
Many people fill their homes in time for retirement. It is easier for any senior homeowner to qualify for a home equity loan than a personal loan. Home equity loans rely less on credit scores and more on the amount of equity created by the property owner.
From an interest rate standpoint, a home equity loan may be more affordable than a personal loan. But in retirement there is a risk of taking out a home loan: seniors who do not pay their bills risk losing their homes.
Personal loans, on the other hand, are not secured loans, meaning they have no specific assets. There are consequences to falling behind on personal debt, such as a loss of credit score, losing a home is not one of them.
The main thing is that personal loans can be safe for retirees as long as they make sure the borrowers can handle their payments. If not, they are a dangerous bet. And this is especially true for seniors and working people.
Ascent’s best personal loan for 2021
The Ascent team examined the market to bring you a shortlist of the best personal loan providers. Whether you want to repay the loan early by lowering your interest rate or need some extra money for a larger purchase, these best-in-class choices can help you reach your financial goals. Click here for complete information on Ascent’s top picks.
Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No journalist was involved in the writing and production of this article.