Alternative Loans for Senior Demographic Carry Costs and Benefits
There are numerous alternative loan options for the retiree demographic - all with costs and benefits associated. These loans include reverse mortgages, installment loans based on SSI, and registration loans. While these unsecured and secured loan types can be advantageous to seniors with limited income sources, many of these lending options also receive criticism for their possible risks.
To elucidate the pros and cons of such loans for retirees, a 2013 article in FDIC Consumer News notes that as consumers get older, they frequently grapple with financial issues such as how to maintain their lifestyle and while covering medical and other expenses on a fixed income such as a pension or social security income. They thus face important decisions when investigating the many alternative loan options available to them.
Of the numerous financing options for seniors, reverse mortgages are an increasingly popular option. A reverse mortgage is a type of mortgage which allows seniors to access the equity in their homes without having to pass credit or income requirements. The qualifications for a reverse mortgage include the owner being at least 62 years old, that the home is occupied by the owner and that the owner has equity in the home.
Specifically, when obtaining a reverse mortgage, the homeowner takes out a loan against the principal amount of the home, but is under no obligation to make payments against the loan. The loan may be taken in the form of a lump sum or fixed payments. As payments are received, the owner's equity in the home decreases.
A major advantage of reverse mortgages is that they are a source of income for seniors who otherwise have no other means. When taking equity out of a home through a reverse mortgage, one can decide on receiving a line of credit, payments or even a lump sum. For seniors living on a fixed income,they can improve their income by taking a reverse mortgage and choosing the fixed payments option. Also, because the income from a reverse mortgage qualifies as a loan, the proceeds are generally tax free.
Additionally, there are usually no penalties relating to social security or Medicare payments that the homeowner may currently receive. The title to the home remains in the name of the homeowner.
A June 15 2015 article published by Consumer Affairs “Reverse Mortgage Risks & Reform” points out that the U.S. Department of Housing and Urban Development (HUD) has eased mortgage policies for non-borrowing spouses. “The move is aimed at reducing foreclosures and states that this is a major benefit for retirees. The policy will now allow reverse mortgage lenders to transfer some loans to HUD when a borrower dies but is survived by a non-borrowing spouse.”
The landscape of reverse mortgages for the senior demographic is riddled with controversy, however, and should be regarded as a final option for retirees seeking additional income, according to some sources. An April 2015 AARP article “Are Reverse Mortgages Helpful or Hazardous” notes that they are marketed to older adults, and “both provide and deplete” needed income, stating that such loans should be viewed as a “last resort.”
The AARP cautions it’s possible that Medicaid eligibility could be affected by a reverse mortgage. Also, in processing a reverse mortgage, “[l]enders usually charge origination and closing costs which can equate to several percentage points of the home’s value. And while the interest rate is variable while interest rates are currently bottoming out, rates could rise significantly over the course of the loan,” according to the article.
Furthermore, with a reverse mortgage, seniors are still responsible for paying homeowner’s insurance and taxes. Failure to make these payments could cause the loan to be called due prematurely. Finally, retirees should beware that their equity will be eroded by taking the mortgage, and they will thus will have fewer assets for their family as a result.
Installment loans based on Social Security Income are another popular option for the senior demographic. A major benefit of installment loans is that the term of the loan and the interest rates are all agreed upon when you sign for the installment loans, which will mean that the borrower knows up front just how much money they will need to pay back over the term of the loan in manageable sums.
However, the interest rates can be the disadvantage to the installment loans. The problem is that if one already has bad credit they will not be able to gain the lower interest rates. At the same time, the rates will change depending on the amount of money that one borrows. While the borrower may only need 3,000 dollars, they may find that the interest rates drop dramatically if instead they take out 5,000 dollars. Seniors are cautioned to determine whether this will mean that they pay back less or whether it will stretch their budget too much.
For retirees with a very low credit score or limited credit history, secured non-traditional loans can be a viable option. One of the more popular types of non-traditional secured loans is a car title loan. To qualify, borrowers are required to provide a lien-free vehicle title in their name as collateral.
An advantage to seniors with limited income and emergency expenses, a vehicle title loan allows borrowers to receive upwards of $50K in exchange for their title - a major advantage for underbanked individuals who require large sums of cash.
A March 25 2015 report published by The Pew Charitable Trusts “Auto Title Loans: Market Practices and Borrowers' Experiences” notes that more than 2 million Americans annually take auto title loans.
There are risks, however, to auto title loans, the Pew report states. “Title loans are plagued by unnecessarily high prices and unaffordable payments that lead to extended indebtedness. But title loan borrowers face the additional risk of losing an asset—a car—that, for some, is their primary form of transportation,” according to the report.
As a result, Pew has issued policy recommendations that address these issues. By implementing these recommendations, the Consumer Financial Protection Bureau and state policymakers can alleviate the harms identified in this research.
In short, consumers are cautioned when taking out the aforementioned loans and are encouraged to carefully review lenders’ policies, state laws, A.P.R., and terms and conditions when considering such loans.