If you’re living on a fixed income, it might be challenging to come up with the cash you need to finance a home improvement project, purchase a new home, or simply live comfortably as a retiree.
Loans seem like a potential solution, but a less-than-perfect credit history can present obstacles.
Are there loans for seniors with bad credit?
The short answer is yes, although your eligibility depends on your specific financial situation. This list will go over eight potential loans for retirees or seniors with bad credit so that you can take the next step towards your future goals.
1. Personal Loans
When searching for loans for seniors with bad credit, a traditional personal loan from a bank or credit union might be the first option that comes to mind.
It’s important to remember loans for retired people with bad credit will often come with a higher interest rate and fees. There may also be severe penalties for missed payments.
That said, if you are confident you’ll be able to pay the personal loan back, some of the best personal loan providers specialize in loans for seniors with bad credit. Just be sure that you’re comfortable with the terms. Pay special attention to the following:
- APR – This is the annual interest you’ll pay on your personal loan balance. The better your credit, the lower the personal loan interest rates are likely to be. Good credit scores (above 800) may see APRs as low as 10%. On the other hand, poor credit scores (below 580) may see APR rise above 30%. This could have a severe impact on your ability to repay the loan and needs to be considered carefully.
- Fixed vs. variable rate – The amount you pay in interest on your personal loan can be fixed. This means it will not change over the life of the loan. This option allows you to be certain about the balance you’ll need to repay.
The rate can also be variable. In this case, the rate will change as the market changes. If you’re taking out a loan when interest is unusually high, you may want to consider a variable rate, but there’s a risk as it could also increase over the life of the loan.
- Secured loan vs. unsecured loan – If you have bad credit, loan providers may require you to secure your loan with other collateral such as investment funds. A secured loan may seem like an appealing option, but remember if you fail to pay back your loan, your lender can seize whatever you put up as collateral. However, secured loans typically have lower interest rates than unsecured personal loans or an unsecured credit card. Types of unsecured personal loans include home improvement loans, payday loans, and medical loans.
2. Home Equity Loan
If you own a home, one way to secure a loan is by accessing the equity you have built in it. For seniors, using home equity for retirement or other needs is a favorable option. A home equity loan (sometimes referred to as a second mortgage) is a loan that uses your home’s equity as collateral so you can access cash now. In short, you’re borrowing against your home’s equity.
To determine your home’s equity, you need to know the current value of your home. Then, subtract the amount you still owe on your mortgage. If you have over 15% equity in your home, you may be eligible for a home equity loan. However, unlike a VA loan or FHA loans, a home equity loan is not backed by the government.
Also, keep in mind that your credit score and income will still be used to determine your loan worthiness for a home equity loan, so you may not qualify.
3. Home Equity Line of Credit (HELOC)
A HELOC is similar to a home equity loan. With this option, you are granted a line of credit using the equity in your home as collateral. While a home equity loan is for a fixed lump sum, a HELOC allows you to spend only what you need.
A HELOC comes with two periods:
- Draw – You take money out during the draw period and don’t have to pay anything back, but interest will accrue during this time.
- Repayment – When repayment starts, you will no longer be able to access funds and will have to pay back all you borrowed plus interest. These terms can make it hard for seniors living on a fixed income to make the necessary payments.
As with other loans for seniors with bad credit, a low credit score will affect your interest rate and eligibility.
4. Reverse Mortgage
You may have seen commercials where Tom Selleck praises the many merits of reverse mortgages. But what are they? They are loans only available for people over the age of 62 who have equity in their homes.
With a reverse mortgage loan, you borrow against your home’s equity and receive your funds in one of three ways:
- As a lump sum
- In fixed installments
- As a line of credit
The advantage of a reverse mortgage loan is you don’t have to pay this money back until you sell your home or pass away (your estate will pay off the loan). However, there are drawbacks. While you don’t have to pay the loan back, interest will accrue on the loan which leads to a few consequences:
- You take on more debt
- You lose equity in your home
- You run the risk of foreclosure
If unexpected expenses arise, the loss of equity in your home could eventually leave you underwater. Likewise, it can have ramifications for future plans, such as leaving your home for your family to inherit after you’re gone. However, getting a reverse mortgage with bad credit is a possible solution. Before you make a decision, be sure to fully review the pros and cons of reverse mortgages for retirement, and familiarize yourself with the types of reverse mortgages, like the Home Equity Conversion Mortgage (HECM) and the proprietary reverse mortgage.
Another way to convert your home’s equity into cash is through a sale-leaseback program. Through a sale-leaseback, you can sell your house and convert your equity into cash while remaining in the home as a renter. With sale-leaseback solutions, you may find an option that provides more personalization and flexibility than traditional financial programs.
6. Cash-Out Refinance
With a cash-out refinance, you take on a new loan with a higher principal than the balance on your current mortgage (but for less than the total value of your home). That loan is used to pay off your existing mortgage and the loan closing costs. Then, the rest of the extra loan amount comes to you in cash.
If you have a good payment history on your current mortgage, this may be an option even if you have bad credit because your lender knows you are reliable. However, it also means you’ll add to your debt and pay more interest over the long run.
7. Auto Loan
Maybe the idea of using your house as collateral isn’t appealing to you. If you own a car, you may be able to use that instead. This works very similarly to the cash-out refinance for your home. Namely, if you’ve paid off part of the value of your car, you may be able to refinance and get access to a lump sum.
An auto loan can be a good option for someone who needs a smaller amount of funds quickly. But a car is not the same as a house. Your car’s value will be much lower, and you run the risk of losing your transportation if you can’t pay back the loan.
8. Debt Consolidation Loan
When researching loans for seniors with bad credit, consider why you need funds in the first place.
If your credit is struggling because you have several high-interest debts, you may be able to fix the problem with a debt consolidation loan. This enables you to take out a large loan to pay off all of your debts. Some reasons to consider a debt consolidation with bad credit are:
- Lower APR – While you’re not guaranteed a lower interest rate, you may be able to find one that could help lower your monthly cost.
- Simplicity – Putting everything together into one loan makes it easier to keep track of your finances. This simplicity could help you avoid defaulting because of confusion over which debts you need to pay when.
- May help you build credit – Again, simplifying things can ensure you meet payment deadlines. As a result, it may help you build your credit and give you access to more loan options.
Debt consolidation may be the right option for some, but it often comes with high fees. And aside from the money, you’ll save on interest payments. It won’t free up any cash.
9. Other Retirement Mortgages
For seniors looking to finance a new home purchase or refinance their current mortgage in retirement, retirement mortgages present a viable option, even with bad credit. Unlike traditional loans, retirement mortgages do not require proof of employment and instead rely on your Social Security, retirement income, or assets.
Qualifying for Retirement Mortgages
Retirement mortgages cater to the unique financial situations of retirees. Most standard loan programs, including those backed by Fannie Mae, Freddie Mac, and government-supported FHA, VA, and USDA, allow for qualification based on Social Security and retirement income without the need for employment verification. This flexibility extends to various types of retirement mortgages, such as conventional loans with potentially no mortgage insurance premiums, FHA loans with lower credit score requirements, VA loans with no down payment needs for eligible retired military personnel, and USDA loans for those retiring in rural areas.
Explore Your Options
As you can see, a bad credit score can make things a bit more complicated, but that doesn’t mean you don’t have options. To find the best one for you, do your research and be realistic with your goals and expectations.
If you’re interested in exploring further, contact a financial advisor.
If you’re looking for loan options as a senior, with bad credit, a sale-leaseback may be the solution for you. If you are unsure of your next move after reading this article, consult a financial advisor to discuss your options.
- Bankrate. Best bad credit loans of January 2022. https://www.bankrate.com/loans/personal-loans/bad-credit-loans/
- Credit Summit. 5 Best Loan Options for Seniors on Social Security. https://www.mycreditsummit.com/loan-options-for-seniors/
- Rocket Mortgage. Senior Mortgages: Home Loans And Refinancing After Retirement. https://www.rocketmortgage.com/learn/refinance-programs-for-seniors
- BadCredit.org. 12 Loans for Seniors with Bad Credit. https://www.badcredit.org/how-to/loans-for-seniors-with-bad-credit/