Loans Available for Seniors on Social Security

Just because you’re retired doesn’t mean you won’t need a loan, but senior citizens may wonder if it’s still possible to get one if they’re on Social Security.

The question has both legal and practical implications. But the answer to both is YES!

Federal law prohibits lenders from discriminating based on age (and other demographics like race and religion) or withholding loans for those who receive Social Security and other forms of public assistance.

That doesn’t guarantee your loan application will be approved. Your Social Security payments are one of the sources of income a lender will examine when considering whether to OK a loan for you.

Of course, just because you can get a loan doesn’t mean it’s the right loan. There are other factors to look for to determine whether a loan is good or bad for your situation.

How to Get a Loan as a Senior on Social Security

Lending institutions look at several factors to determine whether an applicant qualifies for a loan.

Income and assets. Lenders need to know you can pay back your loan, and some lenders have different minimum income requirements. Monthly bank statements, pay stubs and recent tax returns are ways to show how much your income is. Assets that can help retirees qualify for a loan include:

• Social Security check
• Pensions
• Investments
• IRA
• Annuities
• Part-time job Income
• Property

Credit score. Credit scores are a numerical rating based on factors such as existing debt, payment history and the length of credit history. The scores range from 300 to 850. Borrowers with a score above 700 can feel comfortable about receiving a loan. Scores from 660-700 may be approved, but may have to pay higher interest on the loan. Anything below 660 likely won’t qualify for loans – although some financial institutions lend to those with no credit history.

Debt-to-income ratio. Debt-to-income ratio measures what percentage of a borrower’s gross monthly income that goes toward monthly debt service. It helps predict whether a borrower can make payments on new and current debt.

Collateral. Secured loans require you to pledge assets which the lender can repossess the collateral to recoup the remaining loan balance if you can’t make payments.

7 Loan Options for Seniors on Social Security

Based on those factors, it may be difficult to qualify for some loans, particularly if Social Security is your only income source or your credit score is low. However, there are options. Examine them carefully to avoid pitfalls and find what’s right for you.

1. Personal Loan

If you’ve never considered this option, you may wonder how to get a personal loan. Personal loans, which can be obtained through a bank, credit union or online lender, allow you to get funding for personal expenses. Typically, the loan must be repaid by a fixed date, usually 3-5 years. Personal loans may be unsecured, but some require collateral. Unsecured personal loans may have higher interest rates because the lender has no collateral to collect if you can’t pay.

Different lenders offer different options for personal loans. Consult more than one lender, and before taking a loan, consider:

• Interest rate. It will vary depending on the lender, your credit rating and whether the loan is secured or unsecured. A credit score of 630-689 is fair; 690-719 is good; 720-850 is excellent. Paying down current debts is one way to increase your credit score.
• Trustworthiness of the lender. Look up online customer reviews for the lender. Make sure that the lender is properly registered through your state attorney general’s office. Being asked to make an upfront payment is a big red flag. You may be charged an origination fee to process your loan, but that typically is deducted from your loan payments. Do your homework to avoid high-risk loans or outright scams.
• Terms of the loan. Your loan may give you options for how long it will take to pay it off. The longer the term, the lower the monthly payments, but the more interest you’ll pay overall. Check to see if there is a penalty for paying it off early.

2. Home Loan

Your home – especially if you’ve owned it for a long time – could be your ticket to getting money you need. There are several possible loans based on how much equity you have in your home. They include home equity loans, home equity lines of credit and cash-out refinancing. All of these are secured loans that use your home as collateral, and the interest you pay is tax deductible.

Home equity loans (also called second mortgages) are based on the difference between the home’s market value and how much the homeowner owes on the mortgage. Home equity loans usually are fixed-rate loans that provide a specific lump sum that is repaid over a set time period of time (generally 5-15 years). The loan must be repaid in full if you sell the home. The interest rate is higher than that of a first mortgage but lower than other consumer loans.

A home equity line of credit (HELOC) loan is a line of credit based on a percentage of the equity in your home. HELOCs differ from second mortgages in that they offer a line of credit that you can draw on as needed, pay back, and then draw on again, for a term determined by the lender. HELOCs often have a variable interest rate, but some lenders offer fixed-rate options. The low interest rates make HELOCs and option for those seeking debt relief.

A cash-out refinance replaces your current mortgage with a new one with a larger loan amount, taking the difference out in cash. The interest rate is lower than a HELOC, though there are closing costs, and it takes longer to pay off the larger loan.

All home loans have potential downsides. Obviously, if you become unable to make your loan payments, you can lose your house. For loans with variable rates, those payments may rise during the payback period, creating financial stress.

3. Reverse Mortgage

A reverse mortgage loan allows homeowners to borrow money against the equity in their home. With a reverse mortgage loan, however, there are no monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home, either by selling the property, moving into a retirement home or upon death.

It sounds like free money. It’s not.

Interest and fees are added to the loan balance each month and the balance grows. Homeowners must continue to pay property taxes and homeowners insurance, use the property as their principal residence, and keep their house in good condition. The homeowners or their heirs will eventually have to pay back the loan, usually by selling the home.

There are three types of reverse mortgages.

• Home Equity Conversion Mortgages are the most common reverse mortgages. They’re federally insured HECM loans that can be used for any purpose. Borrowers must be at least 62 years old. They might be more expensive than traditional home loans, and the upfront costs are usually high. They are only available through FHA-approved lenders. They’re geared towards seniors on fixed incomes, and there’s a guarantee that you won’t have to pay back more than the home’s value.
• Single-purpose reverse mortgages are agreements in which lenders make payments to borrowers in exchange for a portion of the borrower’s home equity. Borrowers must use these payments for a specific purpose that the lender approves, such as paying for property taxes, maintenance and upkeep of the home or home insurance premiums. They are offered by some government agencies and nonprofit organizations, but they’re not available everywhere. They’re usually the least expensive option.
• Proprietary reverse mortgagesare private loans that are backed by the companies that develop them. They are not as tightly regulated as HECMs and are not federally insured. They make up a small segment of the reverse mortgage market. Most of their customers own homes valued above the $970,800 limit set by the FHA.

4. Payday Loans

Payday loans are small (often $500 or less), short-term loans in which payment is due on the borrower’s next payday. To repay the loan, you generally write a post-dated check for the amount owed or you authorize the lender to electronically debit the funds from your bank, credit union or prepaid card account in case you don’t repay the loan by the due date.

These loans, available through storefront lenders or online, have become notorious for their high costs. Some states put a cap on payday loan fees ranging from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate of 399%. Compare that to the 20% average interest on credit cards or home loans that start at around 8%.

The short term on payday loans means borrowers often can’t raise enough money to repay on time and take another payday loan (with another fee) to cover the first loan. According to the Consumer Financial Protection Bureau, more 80% of payday loans are reborrowed, with nearly 25% being reborrowed nine or more times. The costs can quickly get out of hand, so borrowers should avoid predatory payday loans.

Borrowers who qualify for the Supplemental Security Income program, which serves people with little or no income, have even more to lose – perhaps their benefits altogether. In 2023, a person must have less than $934 in unearned income to receive SSI benefits. A couple can get SSI if they have unearned income of less than $1,391 a month in 2021. Taking out a payday loan while on SSI benefits could raise your income above the monthly threshold, which would cost you that month’s benefits.

5. Car Loan

This follows the same principle as a home loan. If you have equity in your vehicle, you can get a loan using the vehicle as collateral. The upside is the loans are quick and there are no restrictions on how you use the money. However, these loans have high fees and interest rates, short loan terms – similar to that of payday loans – and you will lose your car if you can’t repay the loan. That’s a lot of risk.

6. Credit Card Cash Advance

This is a short-term cash loan from your credit card. If your card has a PIN, you can get such a loan from an ATM. From a convenience standpoint, it’s hard to do better than this. From a cost standpoint, not so much.

Interest rates are high – even higher than credit card companies charge on purchases – and the interest starts accruing immediately. Plus, you’ll pay extra bank fees and cash advance fees.

7. VA Loan for Veterans

There is additional debt help for military veterans. The U.S. Department of Veterans Affairs directly funds or guarantees mortgages and refinancing to active-service service members, veterans, and reserve/guard members. With direct loans, the VA serves as the mortgage lender. VA-guaranteed loans can be accessed through credit unions, banks, and other mortgage providers.

If a VA-backed home loan goes into foreclosure, the guaranty allows the lender to recover at least some of their losses. Since there’s less risk, lenders are more likely to provide better terms. Nearly 90% of all VA-backed home loans are made without a down payment.

The loan options include loans for new homes, refinancing existing VA-backed home loans and cash-out refinance loans, which allow you to borrow against your home equity.

Can You Borrow from Social Security?

Not anymore. A provision that was discontinued in 2010 allowed you to collect benefits at 62, then repay the loan at 70 and re-file for the higher benefits you receive at that age. Another loophole, called “file and suspend,” was shut down in 2016. It allowed a worker at full retirement age or older to apply for retirement benefits and voluntarily suspend those benefit payments – but permitted a spousal benefit to be paid to the spouse while the worker wasn’t collecting benefits. Now, if you suspend benefits, it applies to other potential benefits, such as those to your spouse.

Alternatives to Loans for Seniors

If you’re experiencing a cash crunch and these loan options aren’t right for you, explore other options.

• Refinance your mortgage for lower monthly payments: Since mortgage interest rates spiked in 2022, you may not be able to get lower rates right now, but it never hurts to check. If you expand the length of the payback, it will probably lower your monthly payments, but you’ll pay more in interest over the life of the loan.
• Make a budget: A lot of people get by pretty well without following a budget, but if money is tight, you need to know exactly where you’re spending it. This could tell you how you can make your dollars stretch farther. Are you eating out too much? Are you paying for subscriptions you aren’t using anymore? Is it time to shop around for cheaper car insurance? It’s hard to know without a budget.
• Downsize: That might be big or small. A big downsize is selling the four-bedroom house that you and your spouse are rattling around in and buying something smaller that fits your lifestyle now. You also may own trinkets that are worth more to someone else than they are to you now. Sell them.
• Get a part-time job: One of the advantages of being retired is you have time and flexibility. You don’t want to work 40 hours a week, but you can convert your talents and interests into a side hustle that will help your finances, give you something to do and introduce you to other people.

Additional Financial Help for Seniors

Your financial struggles may need more than a quick, simple fix, particularly if debt is a big part of the equation. There are financial resources for seniors that can help provide the knowledge and practical solutions you may be looking for.

Credit counseling: Good news: You can get free guidance from professionals. A certified credit counselor from a nonprofit credit counseling agency will help you review all options, from creating (or recreating) a budget to filing bankruptcy. Counselors can walk you through the ins-and-outs of a debt management plan, which includes working with multiple creditors to set up one affordable monthly payment. Credit counseling typically is done over the phone or online. Sessions usually last about 30-45 minutes.

Debt management program: A debt management program lowers the interest rate on credit card debt, reducing your monthly payment to an affordable level so you can eliminate credit card debt in 3-5 years. If you owe $5,000 on credit cards and reduce your interest rate from 25% to 8%, your interest payment drops from $105 a month to $33. If you make on-time, monthly payments you’ll be debt free in 3-5 years. Debt management plans are offered by nonprofit credit counseling agencies, who work with creditors to reduce interest rates to a manageable level.

Debt consolidation: A debt consolidation loan can be used to pay off credit card debt for multiple cards. You still owe the same amount, but the benefit is that you only make one monthly payment to the bank/credit union/online lender instead of multiple credit card payments. In addition to simplifying the payments, they’re likely to be at a lower interest rate. Most banks, credit unions and online lenders offer debt consolidation loans, provided you meet the credit score standards. Check for the lowest interest rate you can find.

Debt settlement: Debt settlement is a debt-relief option in which a consumer pays less than what is owed after negotiating with one or more creditors to get them to agree to settle the debt. Despite the obvious benefits, it damages the consumer’s credit report for seven years and can lower the credit score 100-200 points. Also, the IRS treats forgiven debt of more than $600 as income that must be declared on your tax return. The benefit to the credit card company is that it receives some money, as opposed to little or nothing if the consumer defaults.

A credit counselor from a nonprofit credit counseling agency like InCharge Debt Solutions, can help you determine if any of these debt relief strategies is right for you and, if not, how you can improve your financial situation.