Written by Walter Akolo
Many retirees live on a fixed retirement benefits or their personal savings. While the money from these may be enough for basic day to day expenses, it is often inadequate to cater for emergencies or big financial projects.
As a result, applying for a loan may seem as the go-to solution for many retirees. Unfortunately, mainstream lenders consider retired people high-risk customers and therefore decline most of the applications. Having a good credit score doesn’t also give you much advantage in retirement because lenders put more emphasis on your income.
Why do retirees need loans?
In an ideal situation, people in retirement should be enjoying their sunset days with family or doing the hobbies they didn’t have time for when employed. Therefore, from a third person’s point of view, retirees do not need a lot of money and their savings or retirement benefits should be sufficient for their upkeep.
However, this is not usually the case. Many retirees still want to do things that require a lot of money that their savings and benefits cannot cater for.
- High cost purchases
Despite being retired, you may still want to purchase a car, a home or even make an investment that needs substantial capital. Unless you had saved a lot of money while employed, you may need a loan in such instances.
Other times, retirees need loans to take care of emergencies. It may be a medical emergency, broken appliances, or even house and car repairs. Such emergencies may come when the savings or benefits are not available thus forcing you to seek out a loan.
If you have a number of debts, the cumulative rates and charges may overwhelm you. In such a situation you may want to take a big loan to pay off all the debts. This is advisable only if you can access a loan with better terms such as lower rates, flexibility or lower instalments.
Loan rejected despite good credit history
Retired people have difficulty understanding why their loans applications are usually rejected despite their great credit history. The reason for this is that the lender’s primary concern is whether you have the ability to repay the money you borrow. This is why lenders always ask for your income details whenever you apply for a loan.
When employed, your income is stable and much easier to verify. The salary is therefore serves as an indicator of your ability to repay the loan. As a result, lenders consider employed people to have a much lower risk of default compared to unemployed persons.
From the lenders’ point of view, your credit score is only good because you had a stable income and without your previous salary, you are just a high risk customer as someone with a bad credit history.
Calculating your income
Whether you are applying for a personal loan, car loan or mortgage, the lenders will require you to show that you are creditworthy. As a permanent employee, your income and excellent credit history is enough.
Demonstrating your creditworthiness in retirement, however, is a bit harder. The criteria for evaluating income differs from one lender to another. Some, for instance, do not consider income from part time, benefits, superannuation and similar investments admissible in the application process.
The lender that would consider such types of income will still consider you to a relatively high-risk customer thus charge higher rates. In the case of credit cards, the limit is set too low that it may not serve the desired purpose.
How to avoid these challenges
All the challenges that retirees face when applying for loans stem from the perception that they are high risk customers. The solution, therefore, is to package your application such that you present yourself as a creditworthy client.
- Shop around for lenders
The terms and types of loans differ from one lender to another. Establish the type of loan you need then assess various lenders to determine who is offering the most suitable rates and terms. This will also give you a chance to learn the eligibility requirements for specific lender and know how to package your application.
- Sources of income
Your income is the single most important item when applying for a loan in retirement. Create a portfolio of all your income include your pension money, assets and salary from any job you may be doing. Include any money you have saved in your Independent Retirement Account as well.
Keep this portfolio up to date and customize it depending on the eligibility requirements of the specific lender you are dealing with.
- Outstanding debts
Lenders also need to know your commitment to repay loans. Having a list of your current outstanding debts and your progress in repaying them would help a great in deal in this regard. It will also help in negotiating the terms of your loan and repayment schedule.
Also keep a copy of your most recent credit rating from a reputable source.
- Borrow from same lender
If you have been borrowing from a certain bank while you were employed, they probably have your personal details. They also know your credit history. Applying for a loan from the same bank will therefore accelerate the process and increase your chances of getting the loan approved.
- Asset depletion
Using your assets, some lenders can help you secure a loan through the asset depletion process. The bank will evaluate the value of your assets and calculate how much they can lend you based on that value. The lender will also establish how much you will need to repay in monthly installments.
There are many banks and lenders that claim to give loans even to retirees. However, many of them have a very long and frustrating application process and in the end they often fail to approve the request.
Many of those that do approve charge you high rates or give you credit cards with low limits. The solution, therefore, is to document your sources of income. Also understand the eligibility criteria for your preferred lender and determine whether you qualify beforehand. This will save resources for you and the bank.