Pension loans (sometime misleadingly called pension advancements) may seem like a good idea if you are on a fixed income but need quick money. But be careful. Many of these loans come with very high interest rates which can trap a person in debt. In the end it will cost far more to pay off the loan than the amount borrowed, much like the equally harmful payday loans. So if you receive a small pension, a modest Social Security disability or retirement benefit or SSI, or any other form of modest retirement income, you may be a target.
Five Signs of Predatory Pension Loans
- Using the word “advancement” instead of “loan” – Companies try to hide their intentions by describing their offers as “advancements” rather than a loans. This is done for two reasons: to hide the truth from you, and to charge very high interest rates that are illegal in many states.
- Targeting veterans or government retirees – People with government pensions are a favorite target for these lenders because of the guaranteed income. If you are a recipient of a government pension, be extra wary.
- Encouraging you to set up a new bank account – Many of these companies will encourage their clients to agree to set up a separate bank account that will be controlled by the company. They do this because they need to find a way around the law that says it is illegal for government pensions to be given over to third parties.
- Encouraging you to sign a life insurance policy – Since most pension recipients are over the age of 65, some of these companies will take out life insurance policies that cover the loan if the client dies. No legitimate company will do this because the loans made by government-supported creditors still have to be paid by a deceased’s estate. Life insurance has to be signed by the insured person, so if you are presented with what appears to be an insurance policy, walk away.
- High rates of interest – Be sure that you understand what the real Annual Percentage Rate is. Most of these companies charge very high fees.
There are many cheaper ways to borrow money, if you really need it.
Want to learn more?
Pension Advances: Not So Fast (Federal Trade Commission, June 2014)