Do you have mounting one time bills, such as medical bills or a huge home repair bill, such as a broken sewer pipe or a septic tank issue? Are you in a panic looking for a large lump sum that can help you pay that bill? Are you asking yourself, “Can I get a loan against my pension?” The answer is yes, but please don’t if you can help it! There are other avenues that don’t put your financial future in as much danger as borrowing against your pension. In this article, I will tell you about the “pension advance” industry, and show you a few ways to steer clear of them.
Disclaimer: I am not a lawyer or a financial adviser. If you are considering any of the following, get help from your lawyer and/or financial adviser before you start the process.
What is a Pension Advance?
No doubt you have heard the jingle: “I have a structured settlement, but I need cash now!” A pension advance works in much the same way as this type of settlement buyout.
Pension advances, also known as pension sales, loans or buyouts, require you to sign over some or all of your monthly pension checks for a period of time- typically five to ten years. In return, you get a lump sum payment, less than the pension payments you sign over.
This is not the same thing as borrowing against your employer provided 401(K). If you are still working, you can certainly borrow against 401(K) with limited adverse effects. Payments are withheld from your paycheck thereafter until the loan is paid off. About the only thing you suffer is that you won’t be earning interest on the piece of capital you borrowed. And if you quit the employer, you either have to pay the 401(K) back in a lump sum, or you get taxed for the amount you still have left to pay. Small potatoes compared to the possibility of actually losing your pension.
Why You Should Steer Clear
- Interest on this type of advance can be extraordinarily high.
- This type of “loan” is not currently regulated by the same state and federal rules as you would find with a bank loan, because they are advertised as an “advance” rather than a “loan”. Because they are not regulated, businesses that purvey pension advances can set their own rules.
- Because these advances are not regulated, they can and will charge extra fees that you won’t find in a conventional loan.
- Many of these businesses require you to take out a life insurance policy that pays off your “loan” in case something happens to you. This is an extra cost.
- Although there are legitimate businesses that offer pension advances, there are more than enough scam artists disguised as legitimate businesses, once again because that industry is not regulated.
- Again because there is no regulation, you will likely not receive paperwork on the advance, and you likely will find it difficult to check to see if you are getting the promised deal. Also, without proper paperwork, you have little or no recourse, should you decide to take legal action.
- All of these issues together can leave you, not only without your hard-earned pension, but may cause you to be paying creditors for the rest of your life. This can also ruin your credit score, and put you into a worse situation where you can’t borrow money again for years.
Steps You Can Take Instead
Ask your bank for a personal loan. You would still be making payments on a loan, but it would not be attached to your pension.
Get a cash advance on your credit card. Cash advances usually have a high interest rate (APR), but are much preferable than the pension advance, because, again, it is not connected to your pension.
Get a home equity loan or home refinance. Chances are that you have equity in your home. This is a better way to go, particularly if the bill you are paying is related to a home repair. Second mortgages, which is what a home equity loan truly is, tend to have smaller interest rates.
Negotiate with the creditor. My husband and I have done this many times over the years. This works particularly well with medical bills. In most cases, as long as you are paying something every month, the creditor will work with you.
Start working with a credit counseling agency. The great thing about a counseling agency is, that they can take all of your bills and negotiate with all of your creditors. You end up with a manageable payment, and your total debt is reduced to a level that can easily be paid off.
Declare bankruptcy. This seems like a drastic measure, but financial advisers agree that bankruptcy is a far better option than a pension advance. In most bankruptcies, your 401(K) and pensions are protected. A bankruptcy shoots a big hole in your credit score for a few years, but you at least have your pension waiting for you. Bankruptcy courts usually work with you on your future ability to support yourself. They may garnish your wages, but only to a level where you still have a living wage. I went through a bankruptcy (thanks 2008!) and at the time, it felt pretty scary, because you go a long while without knowing what the future will be like. But once you get used to living under your new situation, it isn’t so bad. We were able to buy a car on credit two years after the bankruptcy, and we bought a house after eight years. So it’s not completely horrible, but it is a real challenge, and not for the faint of heart.
If You Have Exhausted All Other Possibilities
A pension advance should be done as a very last resort. Take these steps to make sure you are protected:
Research your provider. Go to the Better Business Bureau or the Consumer Protection Agency, and ask for any records they have on your provider. If there’s anything fishy, find another company.
Get everything in writing. If the company is not willing to put your loan details on paper, then find another financial institution.
Go over everything. Read all the material they have given you to make sure what they say is what they are doing.
Work with a financial adviser or a credit counseling agency. They might even have more avenues you can pursue, such as local or state programs that can help. They can walk you through any paperwork and make sure your providers are legit.
Get your lawyer involved early if there are any problems.
The Best Advice
Of course the best way to handle a situation such as this, is to not get into in the first place. Having an emergency fund put aside can prevent a lot of the brain damage you would otherwise go through to consider a pension advance. Of course, at a time like this, these days, a lot of us are living paycheck to paycheck, and finding money to save is a big challenge. But do your best to save something every month, even if it’s a few bucks, and vow to yourself and your family that you aren’t going to spend it.
Only get a pension advance if it is THE VERY LAST RESORT. And do get counseling from your lawyer and/or your financial adviser, before you do anything with your pension. Don’t let sketchy business practices rob you of your hard-earned retirement!
Please put your comments and questions below, and thank you so much for reading!