10 ways to borrow in retirement

Many retirees think they can’t take out a loan – for a car, a house or an emergency – because they no longer receive a salary. While it may be more difficult to qualify to borrow in retirement, it is far from impossible. One thing that most experts believe should generally be avoided is borrowing from retirement plans — such as 401(k)s, individual retirement accounts (IRAs), or pensions — as it can negatively impact both your savings and the income you’re on. counts at retirement.

Key learning points

  • It is generally better to get some sort of loan than to borrow from your retirement savings.
  • Secured loans, which require collateral, are available to retirees and include mortgages, home equity and cash-out loans, reverse mortgages, and auto loans.
  • Borrowers can usually consolidate federal student loan debt; it is also possible to consolidate credit card debt.
  • Almost anyone, including retirees, can qualify for a secured or unsecured short-term loan, but these are risky and should only be considered in an emergency.

Eligibility for Loans in Retirement

For self-funded retirees, who earn most of their income from investments, rental properties, or retirement savings, lenders typically determine a potential borrower’s monthly income using one of two methods:

  1. Withdrawal of assets counts regular monthly withdrawals from retirement accounts as income.
  2. Asset Depletion, where the lender deducts a down payment from the total value of your financial assets, takes 70% of the remainder and divides it by 360 months.

To both methods, the lender adds any retirement income, Social Security benefits, annuity income, and part-time work income.

Keep in mind that loans are secured or unsecured. A secured loan requires the borrower to place collateral, such as a house, investments, vehicles, or other real estate, to secure the loan. If the borrower does not pay, the lender can seize the collateral. An unsecured loan, which does not require collateral, is more difficult to obtain and has a higher interest rate than a secured loan.

Here are 10 loan options — as well as their pluses and minuses — retirees can use instead of taking money out of their nest egg.

1. Mortgage Loan

The most common type of secured loan is a mortgage loan, where the house you buy is used as collateral. The biggest problem with a mortgage loan for retirees is income, especially if most of it comes from investments or savings.

2. Property Loan or HELOCs

This type of secured loan is based on borrowing against the equity in a home. A borrower must have 15% to 20% equity in their home — a loan-to-value (LTV) ratio of 80% to 85% — and generally a credit score of at least 620.

Notably, the Tax Cuts and Jobs Act no longer allows the deduction of interest on mortgages unless the money is used for home renovations. Another option, similar to a home equity loan, is a home equity line of credit (HELOC).

Both are secured by the homeowners’ home. A home equity loan is a loan that gives the borrower a lump sum in advance that is repaid over a specified period of time with a fixed interest rate and payment amount. A HELOC, on the other hand, is a line of credit that can be used as needed. HELOCs usually have variable interest rates and the payments are generally not fixed.

3. Cash-out refinance loan

This alternative to a home equity loan involves refinancing an existing home for more than the borrower owes, but for less than the home’s value; the additional amount becomes a secured loan.

Unless refinancing for a shorter term, say 15 years, the borrower extends the time it takes to pay off the mortgage. To decide between refinancing and a home equity loan, consider the interest rates on the old and new loan, as well as closing costs.

4. Reverse Mortgage Loan

A reverse mortgage loan (also known as a HECM home equity conversion mortgage) provides regular income or a lump sum based on a home’s value. Unlike a home equity or refinancing loan, the loan is not repaid until the homeowner dies or leaves the home.

At that point, the homeowner or heirs can generally sell the home to pay off the loan, the homeowner or heirs may refinance the loan to keep the home, or the lender may be allowed to sell the home to repay the loan. to settle the balance.

5. USDA Home Repair Loan Housing

If you meet the low-income threshold and plan to use the money for home repairs, you may qualify for a Section 504 loan through the United States Department of Agriculture. The interest is only 1% and the repayment term is 20 years. The maximum loan amount is $20,000, with a potential additional grant of $7,500 for very low-income elderly homeowners if it is used to eliminate health and safety risks in the home.

To be eligible, the borrower must be the homeowner and occupy the home, be unable to obtain affordable credit elsewhere, have a household income less than 50% of the area’s median income, and for grants age 62 or older and are unable to repay a repair loan.

While it may be more difficult to qualify to borrow in retirement, it is far from impossible.

6. Car loan

A car loan offers competitive rates and is easier to obtain because it is covered by the vehicle you buy. Paying with cash can save interest, but only makes sense if it doesn’t use up your savings. But in case of emergency, you can sell the car to get the money back.

7. Debt Consolidation Loan

A debt consolidation loan is designed to do just that: consolidate debt. This type of unsecured loan refinances your existing debt. In general, this can mean that you will pay off the debt for longer, especially if the payments are lower. In addition, the interest may or may not be lower than the interest on your current debt.

8. Modification or Consolidation of Student Loans

Many older borrowers who have student loans don’t realize that failure to pay this debt could result in their Social Security payments being partially withheld. Fortunately, student loan consolidation programs can simplify or reduce payments through delay or even forbearance.

Most federal student loans are eligible for consolidation. However, direct PLUS loans to parents to help pay for a dependent student’s education cannot be consolidated with federal student loans received by the student.

9. Unsecured Loans and Lines of Credit

While it’s harder to get, unsecured loans and lines of credit don’t put assets at risk. Options include banks, credit unions, peer-to-peer lending (P2P) (funded by investors), or even a credit card with an introductory 0% annual rate. Only consider the credit card a source of money if you are confident that you can pay it off before the low rate expires.

10. Payday Loan

Almost anyone, including retirees, can qualify for a secured or unsecured short-term loan. The payday most retirees enjoy is a monthly Social Security check, and it is borrowed against. These loans have very high interest rates and fees and can be predatory.

Only consider a personal loan or a short-term loan in case of an emergency and if you are sure that money will come in to pay it off on time. Some experts say even borrowing at a 401(k) is better than getting caught up in one of these loans. If they are not repaid, the money will roll over and interest rates will rise rapidly.

It comes down to

Borrowing money in retirement is less difficult than it used to be. Lenders are learning how to treat borrowers’ assets as income and making more options available to those no longer in the workforce. Before taking any money out of your retirement savings, consider these alternatives to keep your nest egg intact.