The average U.S. consumer does not have enough in savings to cover a financial emergency exceeding a few hundred dollars. There are financial products such as bank loans and credit cards that offer cash to borrowers, but many find that these aren’t avenues that are appropriate for their needs.
Worse, many find that financial products such as bank loans aren’t an option because their applications have been denied. Fortunately, you may be able to use a pension loan to fund your expense.
Why are banks so restrictive with the amount of money they’ll lend?
Consumers who have ever attempted to apply for a traditional bank loan know how difficult it can be. Here are some of the most common reasons why consumers are denied traditional bank loans:
1. Consumers carry too much outstanding debt.
If a consumer is overwhelmed in debt, then loan officers become nervous about the borrower’s ability to repay the loan.
2. Consumers are carrying too much debt when compared to their income.
This is an issue that can affect consumers of all age brackets and life stages. If a consumer’s debts outweigh their monthly or yearly incomes, then it doesn’t make a bank loan officer feel confident that the consumer will be able to afford to pay back their loan.
This could also be true of a consumer who’s not carrying that much debt. For example, even if someone close to retirement is carrying less than $3,000 worth of debt, if their income is only $4,000, then their debt-to-income ration is too high, and they will likely be denied for a bank loan.
3. Questionable credit scores
While unfortunate, it’s at least understandable that a consumer with poor credit may be denied a bank loan, but often, potential borrowers who refuse to use credit cards could find themselves denied, too.
Many middle-aged and senior consumers find themselves in this position. They refuse to use credit, favoring paying for everything in cash. The problem with this is that credit scores can only increase if the consumer uses credit. In the eyes of risk assessors who determine whether you can get a online loan or not, refusing to use credit is a warning flag.
Bankruptcies can stay in credit reports for up to 10 years, and depending upon the scenario; it may never go away. Even if the bankruptcy has been discharged and cleared, many financial institutions ask if the potential borrower has ever filed bankruptcy.
This means that even as the consumer’s credit score improves, proof of bankruptcy can still hurt them, even years beyond when the bankruptcy was first established.
If traditional bank loans aren’t a possibility for cash-strapped consumers, then other options may be available, such as a loan against their pension plan. Here are some often-asked questions regarding this type of financial product.
What are pension loans?
Simply put, a pension loan is a financial product that allows consumers to borrow against their retirement pension plans.
Keep in mind that one’s retirement pension is a different product than a 401 k. Pensions provide retirement income offered as a guaranteed benefit from an employer. 401 k plans are also meant to provide retirement income, but they are structured on a contribution basis.
Who is the best borrower for pension loan advance?
The best borrower for a pension loan is a consumer who is first able to take a sober look at their financial circumstances. They understand that a pension is a set benefit, and therefore, they can’t manipulate how much money they’d receive as they’d be able to do with a 401(k). Their benefit amount is pretty much set in stone.
Second, the pension loan consumer understands any tax ramifications that might come along with borrowing against their pension benefit. However, in circumstances that require access to significant amounts of cash, it might be worth the consumer’s while to borrow against their retirement benefit.
Third, the borrower should feel good about being able to pay back their loan on time.
Fourth, the borrower may have collateral with which to secure the loan.
Why do people borrow against their pensions?
Consumers borrow against their pension plans for the same reasons they’d request any loan product – they’re in immediate need of funds. There are several ways to obtain loans, and borrowing against one’s pension is simply one of them. However, borrowing against a retirement plan such as a pension makes sense for a couple of reasons.
First, the consumer might find that they have a significant amount of cash at their disposal for emergencies. Second, they’ll find that they won’t have to endure the stringent qualification process that banks require. Third, the consumer might not have access to credit cards, or the consumer might not have access to a high enough line of credit to handle their immediate financial needs.
When is the best time to consider pension loans?
The best time to consider taking out a pension loan is after considering all other options available. It certainly doesn’t make good financial sense to apply for a pension loan for relatively petty amounts of cash. And it also isn’t wise to apply for a pension loan if the consumer is over-leveraged on other loan products.
How do people begin the process of obtaining pension loans?
The first step in obtaining a pension retirement loan is to perform online research on the most reputable companies who offer this type of product. Consumers should keep in mind that there’s a marked difference between companies that offer pension loans and those that offer pension advances.
Here’s the difference: A pension loan is a simple loan made against the current balance of the pension. The consumer will simply pay back the borrowed funds and any applicable fees. A pension advance allows consumers to borrow money, too, but the consumer will be required to pay back future contributions to their retirement plan.
Not only can pension advances prove to be very expensive, but advance loans can also place you in the position to make decisions such as opening secondary savings accounts (with the lender as the secondary account holder). You might also have to take out a special life insurance policy on yourself with your lender as the beneficiary.
What type of purchases can be made with pension loans?
Certain types of loans are specifically for certain consumer purchases. For example, when a consumer applies for a mortgage loan, then they’re expected to buy residential property. If they apply for an auto loan, then they’re expected to use the money to buy a vehicle.
But when a consumer applies for and receives funds from a retirement pension loan, then they may be able to use the money for a variety of purposes. With this said, consumers commonly use the funds to handle big-ticket items, such as health expenses. Or they might find that a lot of smaller-ticket items have added up over time, so they might use their funds to consolidate their outstanding debt. Of course, the funds may also be used to pay mortgage or vehicle expenses, too.
What are the best types of pension loans to obtain?
The best type of loans for consumers to obtain will be those obtained from companies with good ratings from the Better Business Bureau, the FTC, and other reputable organizations.
A reputable company will engage the consumer through a completely transparent loan application process. The consumer should feel confident about the loan they’re able to sign for. They should also feel educated and empowered regarding their repayment terms.
When are pension loan payments due?
The due dates for loan repayments will depend upon several factors. These factors include where the consumer decided to source their loan. Specifically, each loan company will set its own terms regarding the due date of the loan. However, the consumer can rest assured that they’ll never be left in the dark regarding their due date.
When they opt to apply for a loan from a reputable company, then they’ll receive paperwork that completely outlines:
- the principal amount of the loan
- the interest amount that will be collected on the balance
- how many payments will be expected to be paid on the loan if the consumer can’t repay a lump sum
- the due date of the lump sum or the payments on the loan
Are there age restrictions or requirements for pension loans?
Any consumer who applies for any financial product must be over the age of 18. That said, pension loans are a specified financial product for consumers who have typically realized equity on their retirement plan benefit.
So the average consumer for this type of loan will be a middle-aged working person. Someone in advanced age will be retired, and therefore, they won’t accrue any further equity on their pension benefit. What’s more, they’ll rely upon their pension benefit as part of their monthly fixed income plan.
How are pension loans more advantageous than other financial products?
There are clear benefits for consumers who need to apply for this type of loan product. First, they’ll find that they’ll gain access to a hefty sum of cash. The amount of cash they’ll gain access to is often far more than what they could expect to gain from a short-term loan.
Secondly, as mentioned, a pension retirement loan consumer may not have to endure as many qualifying steps as other financial products require. And unlike niche-specific loan products, the consumer may be free to use their loan as they see fit.
While there are several types of financial products on the market available to cash-strapped potential borrowers, many have succeeded in borrowing funds against their retirement pension.