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What is a pension-advance loan?

pension
A pension loan gives borrowers a lump cash sum in exchange for a percentage of the borrower’s future pension payments. The loan is usually paid back in monthly installments. Consumer advocate groups warn against pension-advance loans because they charge high interest rates.

What is a pension?

A pension, also known as a defined benefits plan, is a type of retirement plan often granted to civil servants. Police officers, firefighters, teachers, and military employees usually qualify for pension plans. The amount paid to each pensioner depends on how many years the employee worked for their employer and what the employee’s salary was at the time. Retirees can choose between a lump-sum or monthly payments.

What is a pension loan?

A pension loan is a high-interest loan given with the understanding that the pensioner will repay the loan with their pension. Due to the high interest rates associated with these loans, they are marketed towards retirees with bad credit, who are unable to receive traditional personal loans.

Is a pension loan a good idea?

A report by the New York Times found that the average interest rate on a pension-advance loan was between 27 and 106 percent. Though the pension-advance industry does not have a set regulator, it may soon be investigated by both the Consumer Financial Protection Bureau and the Senate’s Committee on Health, Education, Labor and Pensions.

Personal finance advisors also recommend against withdrawing pension and retirement funds early, specifically because the funds are meant to last the rest of a pensioner’s life. By tapping into that money early with a pension-advance loan, pensioners risk the stability of their golden years.

Scott Pooch, President of SW Pooch and Company, said in an email that pension plans are most effective as long-term saving strategies, not short-term quick fixes.

“Pension plans are an excellent way to save for retirement; they are a terrible way to save for emergencies that pop up a year or two down the road,” Pooch said. “The answer is a Peace of Mind account – a separate savings account only for emergencies that is funded through payroll deduction.”