10 Ways To Borrow When Retired

Many retirees think they can’t take out a loan—for a car, a home, or an emergency—because they no longer receive a salary. In fact, while it can be harder to qualify to borrow in retirement, it’s far from impossible. One thing generally to avoid, according to most experts, is borrowing from retirement plans—such as 401(k)s, individual retirement accounts (IRAs), or pensions—as doing so may adversely affect both your savings and the income you count on in retirement.

Qualifying for Loans in Retirement

For self-funded retirees who are earning most of their income from investments, rental property, and/or retirement savings, lenders typically determine monthly income using one of two methods:

1. Asset depletion: With this method, the lender subtracts any down payment from the total value of your financial assets, then takes 70% of the remainder and divides it by 360 months.
2. Drawdown on assets: This method counts regular monthly withdrawals from retirement accounts as income rather than total assets.

The lender then adds in any pension income, Social Security benefits, annuity income, and part-time employment income.

Keep in mind that loans are either secured or unsecured. A secured loan requires the borrower to put up collateral, such as a home, investments, vehicles, or other property, to guarantee the loan. If the borrower fails to 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 borrowing options—as well as their pluses and minuses—that retirees can use instead of taking funds from their nest egg.

1. Mortgage Loan

The most common type of secured loan is a mortgage loan, which uses the home you are buying as collateral. The biggest issue with getting a mortgage loan for retirees is income—especially if most of it comes from investments or savings.

2. Home Equity Loans and HELOCs

Home equity loans and home equity lines of credit (HELOCs) are two types of secured loans that are based on borrowing against the equity in a home. To qualify for them, a borrower must have at least 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, though some lenders put that at 700 to get a HELOC.

Both are secured by the homeowner’s home. A home equity loan gives the borrower an up-front lump sum that is paid back over a set period of time with a fixed interest rate and payment amount. A HELOC, on the other hand, is a credit line that can be used as needed. HELOCs usually have variable interest rates, and the payments generally are not fixed.

Notably, the Tax Cuts and Jobs Act no longer allows the deduction of interest on these two loans unless the money is used for home renovations.

3. Cash-Out Refinance Loan

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

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

4. Reverse Mortgage Loan

A reverse mortgage loan, also known as a home equity conversion mortgage (HECM), provides either regular income or a lump sum based on the value of a home. Unlike a home equity loan or refinancing, the loan is not paid back until the homeowner dies or moves out of the home.

At that point, generally, the homeowner or their heirs can sell the home to pay off the loan or refinance the loan to keep the home. If they do neither, the lender is authorized to sell the home to settle the loan balance.

5. USDA Housing Repair Loan

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 U.S. Department of Agriculture. The interest rate is only 1% and the repayment period is 20 years. The maximum loan amount is $40,000, with a potential additional $10,000 grant for older, very-low-income homeowners if it’s used to remove health and safety hazards in the home.

To qualify for USDA Housing Repair Loan, the borrower must be the homeowner and occupy the house, be unable to obtain affordable credit elsewhere, and have a family income that is less than 50% of the area's median income. To qualify for a grant, they must also be 62 or older and unable to repay a repair loan.

6. 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 it only makes sense if it doesn’t deplete your savings. In the event of an emergency, you can always sell the car to recover the funds.

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. This may mean you will be paying off the debt longer, especially if your payments are lower. In addition, the interest rate might be higher than the rate on your current debt.

8. Student Loan Modification or Consolidation

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

9. Unsecured Loan or Line of Credit

While harder to get, unsecured loans and lines of credit don’t put assets at risk. Options include banks, credit unions, peer-to-peer (P2P) loans (funded by investors), or even a credit card with a 0% introductory annual percentage rate (APR). You shouldn’t use the credit card as a source of funds if you aren’t completely certain that you can pay it off before the low rate expires.

10. Payday Loan

Almost anyone, including retirees, can qualify for a secured or an unsecured short-term loan. The payday most retirees enjoy is a monthly Social Security check, and that is what is borrowed against. These loans have very high interest rates—anywhere from 390% to 780% APR and even higher in some cases—plus fees and can be predatory.

You should only consider a short-term or payday loan in an emergency, and you should be absolutely sure that there will be enough money coming in to pay it off on time. Some experts say that even borrowing against a 401(k) is better than becoming ensnared in one of these loans. If they’re not repaid, the funds will roll over and the interest will mushroom rapidly.

The Bottom Line

Borrowing money in retirement is less difficult than it used to be, and many alternative options for accessing cash are now available. For example, those people with whole life insurance policies might be able to get a loan by borrowing against their policy.

Additionally, lenders are learning how to treat a borrower’s assets as income and making more options available to those no longer in the workforce. Before taking money out of retirement savings, consider these alternatives in order to keep your nest egg intact.