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How do personal loans for pensioners work?
For lenders, the difficulty in lending to retired people is they can pose a greater risk of not being able to meet repayments – partly because of age and partly because of limited incomes. As a result, lenders may either offer higher rates to older borrowers, shorter terms, or simply refuse loan applications altogether.
However some lenders recognise that retired people may make good candidates for a loan if they meet other criteria and will consider applications on individual merit. Many retired people have assets that are more valuable than their incomes, such as equity in the family home. Lenders can choose to take this into account and offer loans secured against your house, rather than more typical unsecured personal loans.
What types of retirement situations are considered by lenders?
There are many reasons a retired person with a good credit score, decent pension and housing equity would turn to a personal loan rather than their assets to fund a purchase or project.
For example, if borrowing rates are low and stock market investments are performing well, it might be more prudent to borrow at a low rate and keep your assets invested, so that you can continue to benefit from higher returns.
Alternatively, it might be that you are working part time and earning enough, in addition to your pension, to meet loan repayments. If a lender can see that your part-time income will cover repayments and you have enough for living costs, they’ll be more likely to consider you for a loan.
If you have also additional sources of income, such as rental income or dividends, these may be considered as a means of repayment by lenders.
If you manage repayments on other types of credit well, this makes it more likely that lenders will look favourably on an application. It’s harder, but not impossible, for older borrowers with poorer credit to access loans. They might need to demonstrate other assets and income and consider secured rather than unsecured loans.
It’s also reasonable for those with a large amount of savings, investments and pension funds to not want to draw down from these if they can avoid it. Income from pensions is taxable, so a loan paid back out of other income may make more sense.
What loan options can I consider as a retiree?
Unsecured, fixed-rate personal loans are the most popular option. These give you a fixed term, with fixed monthly repayments, but you can usually pay back the full balance at any time if you wish – for example if you chose to sell some shares.
Credit cards can effectively be used as personal loans. If you need to make a large purchase, you might choose to take out a credit card with an interest rate of 0% on purchases for a promotional period (this can even be over 2 years). Alternatively you might choose a credit card charging 0% on money transfers for a promotional period, however, you will usually pay an initial fee of around 3 to 5% of the amount transferred. Depending on factors like the size and duration of the loan, these cards can work out better or worse value than a personal loan.
Mortgages are also an option, if you have a lot of equity and would be prepared to remortgage some of that equity in order to raise finance. Lenders will consider borrowers who are between 70 and 85 when the term ends, but it varies according to the lender. Equity-rich, income-poor borrowers might be inclined towards this option, but they will still have to prove enough income to meet repayments and living costs.
Equity release mortgages, on the other hand, allow you to roll up the interest on the loan, which is then payable on death, allowing retired people to enjoy the equity in their home without having to repay the interest during their lifetime. You can also choose to repay the interest monthly. These are suitable in some circumstances but affect your spouse and childrens’ inheritance so require careful consideration. Rates on these loans also tend to be higher than on standard mortgages.
Second charge mortgages are loans that can be taken out in addition to a pre-existing mortgage, which are secured against your home. However they usually have higher interest rates than primary home loans and it is vitally important that you are able to meet repayments on these if interest rates go up, because your home is at risk if you do not keep up repayments.
Car finance is available to retired people with good credit histories and the ability to meet monthly repayments. You’ll need to provide your driving licence and proof of income.
Credit unions are local community organisations run by members, for members. They can be a good place to obtain unsecured loans for older borrowers. You can find your nearest credit union here.
Elaine & David
Elaine and David have paid off their mortgage and retired. Their home is worth £400,000, they earn a basic joint income from their pensions of £28,000, but do not have other savings. Nor do they have any other debt. They want to help their daughter buy a new car by giving her £6,000 to put towards it. They are 70 and 72 years old.
After tax, their joint income is £1,800 approximately. The couple could take out a loan over five years, with an APR of 7%, giving repayments of £120 a month, leaving them enough to cover their outgoings. A shorter term of three years would give monthly repayments of £180, which would still be affordable to the couple.
What information will I need to give in order to apply?
As well as basic details such as your name, address and date of birth, you’ll need to specify whether or not you are a homeowner (and with or without a mortgage), what you need the money for, proof of income and source of income. The lender will be able to pick up your credit history from credit reference agencies.
Dos and Don’ts of loans for retired individuals
Keep your credit history squeaky clean by paying all bills, such as mobile phone bills or store cards, on time.
Go for the shortest term and highest repayments you can manage, to keep the interest bill down and to clear debts as quickly as possible.
Check your eligibility – particularly the maximum age when the loan term ends, before applying. If you make an application that is subsequently rejected, this will be recorded on your credit file and you might not be able to make another loan application for a few months.
Consider different types of borrowing – for example, whether or not you’d be better off with a credit card.
Consider whether there is likely to be any other large outgoings cropping up in the near future that would require further borrowing or put an extra strain on your income.
Borrow more than you need.
Underestimate your living costs when calculating how much you can afford to repay.
Apply for more than one loan at a time.
Lie about your age.
It depends how much you are borrowing, what you are borrowing for and how much extra cash you currently have at the end of the month with which to repay finance. For smaller amounts, credit cards and personal loans are ideal. If you are borrowing more than £10,000 and own your own home outright, then other options such as equity release could come into play.
If you are retired, you are likely to be on a fixed income and a tight budget. Make sure you have enough to meet regular living costs plus enough to cover unusual expenses before you take on the responsibility of monthly debt repayments.
Every lender has their own underwriting policies and in the market for loans for retired people, there are no general terms and conditions that apply across the board. This makes it very important to shop around.
Yes, some lenders will let you take out a personal loan even if you’re over 70 or 75, including Sainsbury’s Bank and M&S Bank.
Yes, you can still be eligible for a loan if you’re over 80, but you may find that you have a more limited choice of lender compared to someone aged under 75.
Most loans are for things like buying a car, home improvement or the holiday of a lifetime. Sometimes, lenders will refuse to lend if you are borrowing to consolidate other debt. But it’s your general financial picture, rather than the purpose of the loan, that is more important.
If you have savings and investments, it could be a good idea to speak to an adviser about whether it is best to use some of your assets or to take out a loan.
There are equity release specialists, such as Saga and Key Retirement Solutions. However for personal loans, there are no specialist lenders. You will need to check the eligibility criteria before applying.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
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