Are Personal Loans a Bad Idea for Retirees? Experts Weigh In
Written by
Josephine Nesbit
Edited by
Zuri Anderson
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Personal loans often come with a bad reputation, but they can make sense when you’re juggling multiple debt payments and dealing with high interest rates. However, borrowing in retirement raises unique concerns.
In many cases, retirees deal with fixed incomes, limited cash flow and a goal of making savings last, and taking on new debt can be risky. So when, if ever, does a personal make sense for retirees? Here’s what experts had to say.
When Personal Loans Are a Bad Idea
“Debt should be avoided when possible,” Ashley Morgan, debt and bankruptcy attorney and owner at Ashley F. Morgan Law, PC in Northern Virginia, wrote in an email. “But when you have retirees, debt can be even riskier. Most retirees are on a limited or fixed income. This means that finding money to deal with the debt.”
That reality often plays out through credit card balances.
AARP research found that nearly half (47%) of older adults age 50 and older carry credit card debt and use credit cards to pay for basic living expenses. Half of those who carry debt feel financially insecure and tend to have lower incomes, higher credit card balances and are more likely to see their balance increase over time, AARP added.
“Personal loans typically have high interest rates and uncover a deeper issue of financial sustainability,” explained Chad Gammon, certified financial planner and owner at Custom Fit Financial. “It is very easy to get trapped through the cycle of personal loans and it could be a good idea to get help through counseling or talk more with your advisor.”
When Personal Loans Can Make Sense
In some situations, taking out a personal loan could make sense.
“I would avoid personal loans as a retiree in general, but there could be a few times they could make sense,” Gammon claimed. “For instance, if you have a narrow window of time where you’ll be paid soon but need cash to cover that time. I would not want to do this on a consistent basis, but more like a one-off.”
Debt consolidation to pay off high-interest debt may be another good reason.
“If a retiree with higher-interest debt (like credit card debt) can qualify for a personal loan at a favorable rate, they can use the proceeds to pay off the higher-interest debt, it may be a smart idea,” wrote Kyle Enright, president of lending at Achieve in San Mateo, California.
He also explained that it could make sense if you need to take care of an unplanned critical expense, like a medical bill or need to make a major purchase. But before taking out a personal loan, experts say retirees should carefully consider why they need the loan and their repayment ability.
“You need to look at why you need the loan and do you have a way to pay it off,” Morgan wrote. “Too often someone takes a loan to deal with an issue, but there is no understand of how to pay that debt back.”
Morgan also recommends looking at whether it’s a predictable expense or another ongoing expense.
“If this could happen again, then you need to be looking at adjusting your budget going forward. If this is a one-time expense, you are still adjusting your expenses to pay off the debt,” she wrote. “Sometimes this means reducing expenses or increase income, both of which tends to be more difficult for retirees than the average person who is working.”
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