Can I Get a Loan in Retirement?
From weddings to big promotions, there are many milestones in our lives, and retirement is one of them. But, like in your working life, in retirement there comes times when you need access to funds for a big life event, such as helping your child buy their first home.
You’ve probably weighed up the pros and cons of leaving the world of work for some time, and after careful deliberation, are satisfied to call it a day and begin the next stage of your life. However, with retirement comes many questions.
And one we often get asked is: ‘can I get a loan if I’m retired?’
The answer is: yes, you can.
Whether it’s taking out a personal loan, remortgaging your property, or funding the purchase of a new car, loans in retirement are possible.
What do lenders look at when you apply for a loan in retirement?
There are a number of considerations to bear in mind if you’re thinking about how to get a loan when retired. Before you start planning too far ahead, you must realise that retirement isn’t only synonymous with relaxation and fun, but financial changes that you may not have considered pre-retirement.
With the loss of a regular income from employment, lenders will be more wary of your financial status and may view you as a greater risk. Regardless of your credit score, how long you’ve worked or how much you’ve saved; an income will always form the core crux of your financial viability when it comes to taking out a loan.
Many people take out loans before they retire and plan to then retire within the loan's term agreement. If this is the case, both you and the lender will need to ensure you can cover any repayments following the loss of your work income.
Of course, this doesn’t mean it’s impossible for a retired individual to take out a loan. Lenders will look at your credit score and your overall financial situation, looking at any income you may have from pensions, part-time work, dividends, and rental income for example, to come to a decision on a loan application.
Those who have good credit scores will fare much better than those who don’t. Similarly, generous pensions from the state or your employer will also make it more likely that a lender will agree to a loan with favourable terms.
Of course, in this era of the rising retirement age, many retirees simply reduce their working hours or find employment elsewhere on a lower salary or less hours. In addition to your pension, this may be enough to cover the repayments for the loan you want and could be a suitable option if your pension is not deemed strong enough by lenders.
Ultimately, if you have adequate income that means you can realistically afford to make the loan repayments and you meet the lender’s other eligibility requirements, your loan application stands a good chance of being accepted.
Let’s start things off with the first and most common question you’ll likely get asked:
Most lenders will typically set a maximum upper age for their loans – and these factors can gradually come into play from your 50th birthday onwards. Some may even have a cut-off point of 75.
You may be on the verge of giving up your income for a retirement pension. Or you may have already retired and be living off your savings and pension. Whatever situation you find yourself in, it’s important to know what your income is/will be.
If it is considerably lower than what you were earning pre-retirement, some lenders may offer you a deal with high interest rates, secured lending options, or not lend to you at all.
If you decide to take out a secured loan, you’ll most likely be using your property as the security. With any secured loan, it’s important to always consider the financial repercussions. Should you be unable to repay the loan, lenders may repossess your property, so always bear these risks in mind before committing to this type of loan agreement.
Why might you take out a loan in retirement?
Many imagine retirement as a stress-free period where loans, incomes and tax returns are a thing of the past. However, with increased time on your hands, you may just find yourself wanting to do things you simply didn’t have time to do before – and these things could cost more money than you have.
These could include home improvements, such as adding an extension to your living room, holidays, making big purchases like a car, or lending or giving money to family members.
Taking out a loan can allow you to fund these plans without needing to withdraw money you may have in long term investments, such as your pension. Accessing a low rate of interest by borrowing, will enable you to borrow money over a shorter term without impacting on your longer term retirement investments that need to be left intact to reach full retirement projections.
Types of Loans
So long as you qualify for the lender’s eligibility requirements, you will be able to choose from a variety of retirement loans. Listed below are some of the most popular.
One of the most popular loans for the retired, unsecured loans simply pay you a lump sum of money, which you are required to repay in fixed instalments over a set number of months, alongside interest. This option can be suitable for when you need a smaller loan.
Credit cards can be a way to access money quickly and be able to pay it back at a later date. They can be useful for smaller, short-term borrowing and there are several types of credit card available, depending on your lending history and financial situation.
For example, if you require financial capital to finance a large purchase, you can use certain credit cards with an interest rate of 0% on purchases for certain promotional periods. These can typically last up to two years.
For those with adequate equity in a property, you could simply remortgage some of it to raise capital. In this instance, banks will often consider any applicant between the ages of 70 and 85 when the term ends, though some specialist providers have no age limit at all.
Equity release mortgages
Unlike a regular mortgage, equity release mortgages allow you to take advantage of the equity. Bear in mind that these types of loans are complex and should only be considered in specific circumstances due to the many areas they can impact on including tax, spouse & inheritance. Specialist advice is essential.
Car finance applications are more likely to get approved because they are secured by the model you are buying. Whilst paying in cash will save interest, going with the loan option will keep your savings intact.
Debt consolidation loans
This is a loan that does exactly what it says: consolidate debt. Retirees can apply for this type of loan to bring together any existing debts. Remember, even if the overall interest rate in your new consolidation loan is lower than your existing debts, if you extend the term of the loan, you could end up paying more in the long term.
Is a retirement loan really for me?
Ultimately, it all comes down to one question: is a retirement loan for me? If you’ve read through our article and believe you have the necessary and financial means to consider one, then you could find the solution you are looking for.
The personal loan market can be an intimidating place, so you’ll want to do the necessary research before making any decisions.
But remember, any loan secured against your property will put it at risk of repossession if you cannot meet the loan’s repayment plan.
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more