Pension loans are loans given to retirees or pensioners where their future pension payments are used as collateral. In a typical pension loan, the pensioner will take a lump sum of cash in the short term in exchange for a certain number of his pension payments in the future. While there are many potential pitfalls to be aware of, pension loans can be a good option for some people who find themselves in need of cash in the short term.
There is a certain demographic segment that pension loans are designed to benefit. For example, they can be good for pensioners who find it difficult to get financing through traditional sources. Many financial institutions do not consider a pension plan as a valid source of income, for the purposes of underwriting a loan. If the person does not have other considerable assets to borrow against, they may be seen by banks and other lending institutions as unqualified borrowers, and financing may be impossible to obtain.
Those organizations which offer pension loans typically buy a certain number of future pension payments at their present value. In exchange, they receive the right to collect those payments in the future, rather than the retiree doing so. Pension loans are not strictly loans in the traditional sense, where money is borrowed at a fixed interest rate. A pension loan carries no interest rate, but it still involves the use of future money in the present. In that sense, it is a loan and should be approached with the caution one would always use when taking on a debt.
The funds provided by a pension loan can be used for whatever purpose the retiree sees fit. This is another way in which these loans differ from a traditional loan, which is usually used to make a single specified purchase, such as a car or a house. Most pensions, whether provided by a public or private entity, are eligible to be considered for a pension loan.
There are a few important points to keep in mind when considering a pension loan. First, the person taking the loan must usually have current employment or some other source of income than just the pension itself, in order to be approved. Also, depending on the type of pension or retirement plan you have, you should look into the tax implications of a pension loan, to make sure that that particular strategy is right for you. The help of a qualified accountant may be of some value here, as in most financial matters.