You can use a personal loan for many different reasons, including debt consolidation, medical expenses or home repairs. But just because you might qualify for a loan doesn’t mean you should get one.
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If you’re retired and thinking about taking out a personal loan, weigh your options carefully. While you’re at it, ask yourself these questions first.
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Can I Afford It?
Personal loans can be expensive. The larger the loan — and the higher the interest rate — the more you’re going to pay over the repayment term.
You could get a loan for a few hundred or a few thousand dollars. You could choose a relatively short repayment term — say, a few months — or get one that takes years to repay. Longer terms typically mean smaller monthly payments, but higher overall interest charges.
Some lenders charge additional fees, like origination fees or late fees. In some cases, you might be hit with a prepayment penalty for trying to pay it off early.
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The average retiree receives just under $2,000 monthly (estimated) from their Social Security benefits. You might have other income sources or get a higher paycheck, but is it enough to cover the personal loan and your regular bills?
“Determine if you can afford this additional bill each month,” said Casey Brueske, certified credit union financial counselor (CCUFC) and community education development specialist at PenAir Credit Union. “As a retiree, living on a fixed income means you need to ensure this fits within your budget.”
Do I Qualify for Decent Rates and Terms?
According to Forbes, personal loan rates typically range from 7% to 36%. Rates depend on your credit score, income and related factors.
Here’s what your monthly payment might look like on a $5,000 personal loan with a three-year repayment term (based on different rates):
7% interest rate = $154 monthly
22% interest rate = $191 monthly
36% interest rate = $229 monthly
Between the three options, that’s a $75 monthly difference.
According to the Center on Budget and Policy Priorities, roughly 10% of people ages 65 and up who collect Social Security fall below the poverty line. The 2024 federal poverty line for a one-person household is $15,060.
Retirees who fall below the poverty line earn about $1,255 a month. Depending on how tight your retirement income is, even a relatively small personal loan could be detrimental to your finances.
Is It Absolutely Necessary?
Brueske noted that getting a personal loan could be a good idea if you get a low interest rate and manageable monthly payments. But you should still consider whether it’s necessary.
A loan “can provide you with immediate access to extra funds, which is beneficial for unexpected expenses, home repairs and more,” said Brueske.
But if you can get what you need without taking on a loan, you might want to consider that.
Am I Aware of the Risks?
Taking on a new monthly bill can be stressful — not just on your budget. Falling behind on payments could mean late fees or penalty APRs.
It can also impact your credit score or lead to calls from debt collectors — things nobody needs, least of all those who should be enjoying their golden years. Make sure you’re prepared for any risks.
Will My Financial Situation Change?
Consider your overall financial picture and think about whether or not it’s likely to change — either for the better or worse — going forward.
“If you’re on a fixed income, a loan might put a band-aid over your financial situation, but that cover will only last a few months,” said Melanie Musson, finance expert with InsuranceProviders.com. “Eventually, the money you borrowed will run out, and you’ll then have to pay an additional bill to repay what you borrowed.”
If you’re taking out a loan because you’re struggling to make ends meet, that loan will only help temporarily. You might need to make some lifestyle changes or find other ways to reduce expenses.
Are There Other Options or Resources Available?
“Taking out a personal loan is rarely a good idea for a senior. You could end up in a hole you can’t dig out of,” said Musson.
Before taking out a personal loan, look into other financial resources first. There are government and community programs that can help with things like food, energy and medical costs. Many of these resources are only available to those earning below a certain amount, or to seniors.
Your state government’s website or USA.gov are good places to start.
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This article originally appeared on GOBankingRates.com: 6 Things Retirees Should Consider When Taking Out a Personal Loan
