Pension loans, also known as retirement plan loans, allow you to borrow money from your retirement assets. While most people would typically shy away from borrowing money saved for their twilight years, it can be a good course action if one is left with no other alternative.
Terms and conditions for getting pension loans may vary from country to country. In some countries, you can only borrow from employee-sponsored retirement plans. In other places, only specific individuals (such as federal, government or military personnel) can avail of retirement account loans. Try to check with your country of origin to see various rules for borrowing against your future pension.
Advantages Of Pension Loans
Here are some of the reasons why you would want to apply for a pension loan:
- You are essentially borrowing your “own” future money. The funds you borrow are taken from your own assets. This is especially useful if you have already built a significant amount through years of regular contributions. Applying for the loan can be a breeze because you are borrowing from yourself, not from someone else.
- They can be repaid over a long period of time. Pension loans are considered as medium-term debt that can be repaid over a period of up to five years. If you are using the loan for purchasing a primary residence, the payment terms can be stretched over a longer period. Check the rules in your country to find out what applies.
- It doesn’t impact your credit scores. Because you are borrowing from your own assets, pension loans are usually not reported to credit bureaus. They also rarely affect your credit score, even in cases of default.
Disadvantages Of Pension Loans
- Risk of losing your retirement fund. While most people would do everything to safekeep money for their twilight years, those who avail of pension loans risk losing their retirement funds. Future pensions are valuable assets that can have tremendous impact on the quality of life if lost.
- High potential of default. In case you lose your job, most retirement plan loans would require you to pay back your outstanding debt within 60 days or so. Failure to do so could result in penalties and tax disadvantages. Plus, the unpaid amount would be considered a cash-out from your retirement account.
Who Should Avail of Pension Loans?
People with emergencies and urgent cash needs are the ones who usually take out this kind of loan.
Those who are looking to get rid of high-interest debt (such as personal loans or credit card debt) may also try pension loans.
For those who want to build their dream home and looking for more leverage, a pension loan can be taken to minimize debt load from the bank.
What To Consider For Taking This Kind Of Loan
It is best to avail a pension loan only if you have a stable job and enjoy security of tenure. You can try availing of this after exhausting other means of borrowing.
Before you borrow against your retirement account, establish clear reasons why you need the money. Make sure the benefits outweigh the risks, then have a detailed plan on how to repay the debt.