Personal Loans on Retirement Income

What the law says about retirement income and age

Federal fair-lending law sets the ground rules: the Equal Credit Opportunity Act, carried out through Regulation B. Section 1002.6(b)(5) says a creditor "shall not discount or exclude from consideration" an applicant's income because it "is an annuity, pension, or other retirement benefit." The same sentence lets the creditor consider "the amount and probable continuance of any income." The official commentary adds detail that matters in retirement.

• A lender may not score or otherwise count against you the number of sources of income such as retirement income, Social Security and Supplemental Security Income.
• If a lender sets aside any protected income, that must be based on your actual circumstances, not an automatic rule.
• A lender need not consider income at all; but if it checks some income components and not others, it must treat the protected income it did not check as reliable.

On age, Section 1002.6(b)(2) bars a creditor from taking your age into account except in narrow ways. A statistically sound scoring system may use age as a variable only if an elderly applicant's age is not given a negative value. A lender judging an application by hand may consider age only to assess a pertinent element of creditworthiness, and any lender may use age to favor an elderly applicant.

How lenders verify retirement income

The Social Security Administration describes the benefit verification letter as proof of income that lenders often request. Signed in to your account, you can download it as a PDF right away. By phone, the automated line at 1-800-772-1213 runs around the clock in English and Spanish; say "proof of income" at the greeting. TTY users can call 1-800-325-0778.

Form 1099-R reports distributions from pensions, annuities, retirement and profit-sharing plans and IRAs, so it shows a year of payments in one place. Bank statements showing the deposits arriving each month back up both documents.

Worked example: fitting a loan to a fixed income

Suppose you receive $2,100 a month from Social Security and $1,100 from a pension, $3,200 in all, and you need $6,000 for a roof repair or a car. A longer term lowers the payment but adds interest. The figures are worked examples, not offers.

The five-year loan saves $65.82 a month and costs $833.76 more in interest. On a fixed income, the question is which payment you can keep up through a year with an unexpected bill. Before you choose, list your fixed costs (housing, insurance, Medicare premiums, utilities and food) and see what is left once the new payment comes out. If the shorter loan leaves too thin a cushion, borrowing less often beats stretching the term. Our loan term calculator lets you try other amounts.

What can raise the rate or lead to a denial

• High debt payments relative to a fixed income, including a mortgage, a car loan or card balances.
• A thin recent credit file if you have paid cash for years and closed old accounts.
• Income that ends before the loan does, such as a short annuity or a shrinking account balance.
• Errors on your credit report, which you can dispute before you apply.

If a lender turns you down, it has 30 days from the day your application is complete to tell you, along with its principal reasons or how to ask for them. A notice that mentions your age, or treats your pension as worth less than a salary without a reason tied to your situation, is worth questioning; you can complain to the Consumer Financial Protection Bureau. What to do if you are denied covers the next steps.

Safer options and what to watch for

• A credit union loan. If you have banked there for years, your record of deposits helps. Federal credit unions may also offer small payday alternative loans under an NCUA rule.
• A loan secured by savings or a certificate, often at a lower rate, without cashing in the savings.
• A cosigner, such as an adult child, who becomes fully responsible if you cannot pay. Agree in writing on what happens if either of you has trouble.
• Home equity, if you own your home: often cheaper, but your house secures the debt. Our sister site Lendmira explains home equity loans.

Read the offer for add-ons. Credit life or disability insurance and debt protection plans are sometimes offered at closing. Regulation Z lets a lender exclude their cost from the finance charge just when the coverage is voluntary, disclosed in writing and signed for, so a policy you never asked for can sit outside the APR. Our page on credit insurance and add-ons shows what to check.

Questions people ask