Retirement is one of life’s milestones. For most of us it marks the period when we can finally relax and enjoy life after decades of working. In some cases, this might mean flexing your financial muscles or even taking out some form of credit.
This is fine, indeed many lenders consider older people less of a risk as they are more likely to fully appreciate the potential dangers associated with taking on debt. Additionally, it’s a period of your life when your income - likely from a pension - is far more secure, if generally lower, than when you were working. Even so, there will be considerations to ponder.
Your age: Lenders set a maximum age for loan applications, and some may restrict a loan's term to meet a set age, typically at 70 to 75. Check for age restrictions when you compare loans, as some will cover older people.
Your income: Assess what your income will be when you retire, then calculate how much you'll need to cover your monthly outgoings. If your income is below the amount that you’d need to ensure you could meet repayments, it could affect how much you'll be able to borrow.
Your assets: If you choose a secured loan, you need to link it to an asset you own, like your property if you're a homeowner. If you can’t repay the loan, the lender could repossess your property.
If you want to get a loan before you stop working, but expect to retire during the loan's term, make sure you can cover your repayments on your retirement income.
Alternatively, you could try to repay the loan before you retire. Be aware of any fees for early repayments. It could be worth just setting up a direct debit to cover the loan rather than taking a hit to clear what you have borrowed.
Just because you're retired or planning on retiring doesn't mean you can’t borrow any more.
At this stage in life, you may have plenty of assets, but have less in cash, so if you need to make a large purchase or want to fund home improvements, a loan may be your best bet.
If you are retired but have a good credit history, a decent pension, and equity in abundance, taking out a personal loan to fund a purchase or project might be wiser than selling assets or cashing in investments.
This is especially true in an economic climate where interest rates are low and stock market investments are performing well.
Alternatively, it's possible that you're working part-time and earning enough, in addition to your pension, to afford the repayments for the loan you want.
As long as you meet the lender's eligibility requirements, you can get any kind of loan. These include:
Personal loan: This is the most popular option. Unsecured loans pay out a cash lump sum, which you repay through fixed monthly payments over a set term
Credit cards: Though credit cards differ from personal loans, they can be used as personal loans. If you need to buy something expensive, you can take out a credit card with an interest rate of 0% on purchases for a promotional period, which can last up to two years. Ensure you switch before the 0% term ends and your card starts to charge a high rate of interest
Mortgages: If you have a lot of equity you could remortgage some of that equity in order to raise finance. Lenders usually consider borrowers who are between 70 and 85 when the term ends, but the age range varies according to the lender, so do your homework
Equity release mortgages: With an equity release mortgage, you can free up capital from your home without having to repay the sum borrowed or any interest during the loan’s lifetime. It’s an option, but not one to be taken lightly, as it can affect your spouse’s and children's inheritance. Rates on these loans tend to be higher than on standard mortgages
Car loan: A car loan offers competitive rates and is easier to obtain because it is secured by the vehicle you are buying. Paying with cash could save interest but only makes sense if it doesn't eat into your savings. But in the event of an emergency, you can sell the car to recover the funds
Debt consolidation loans: This type of unsecured loan refinances your existing debt. Generally, this means you can pay off all your debts over a longer period. It’s worth noting the interest rate, however, as it may or may not be lower than you’re currently paying
Finally, and this is a general point, any loan that is secured against your home puts your property at risk of repossession if you cannot meet repayments.
If you want to take out a retirement loan, it’s essential to assess your finances to ensure you can borrow money and still live comfortably. Here are a few things to think of before applying:
Check your credit report and score to ensure there are no errors or misinformation to improve your chances of being approved. There are three credit agencies; any one should give you an idea of your status: Experian, Equifax and Transunion
Only borrow what you need on the shortest repayment plan you can afford to keep interest repayments low
Check for age restrictions which could prevent you from getting a loan with a lender before applying
Calculate your living costs and other future expenses to ensure you still have enough money left over after your monthly repayments.
Using pension income is an alternative to taking out a loan, but it comes with caveats.
Current rules mean once you reach 55, or earlier if you’re in ill health, you can draw down your pension. The issue here is your pension is classed as income, which is taxable and could affect your ability to borrow.
Yes, you can take up to 25% of your pension fund tax-free, then you have six months to start taking the remaining 75%, which is taxable. So, it makes sense to work though the numbers.
You can take some or all of this as cash, buy an annuity or invest it. All options are alternatives to loans, and worth considering, although you’d be wise to take professional advice first.
The chances are you’ll look to borrow cash to cover a project, perhaps buying a holiday home, new car or your child or grandchild’s wedding. But there is always the risk that you might pass away before you’ve repaid what you owe.
If this happens, the lender will seek to recover what they are owed from your estate, which could mean a slice of your loved ones’ inheritance is removed. This is certainly the case if you take out a joint loan – as the surviving partner has to pay what’s owed.
If you took a loan out in your own name and have no assets, a lender can’t normally pursue your family for the debt.