Almost everyone needs to borrow money once in a while. People on a pension are no exception. But if you are on an Age Pension, a Disability Support Pension (DSP) or a Carer Allowance, your options for a personal loan are somewhat limited. If you have no assets to offer as security for the loan, and if your credit score is poor, this becomes even more difficult.
We have done the research on personal loans for pensioners, what the risks are, and share some other alternatives you may want to consider.
In this guide
Can a pensioner get a personal loan?
Yes, but you should expect some banks to be reluctant to offer you a loan.
Non-bank lenders are more likely to approve applications from pensioners. Some lenders may expect you to have an income other than your pension from Centrelink. There are lenders who ask for over half (50%) of the income to be from a source other than Centrelink.
Can a pensioner with bad credit get a loan?
Yes. Even with a bad credit score in the 549 or below range, you may be able to take a personal loan while on any type of pension. However, the rates offered will be higher. Find out why here.
How much can I borrow on a personal loan?
In general, expect traditional lenders to cap the loan amount at $2,000. However, in some cases, you may be approved for a loan up to $3,000.
If you have a long-term good relationship with your bank or if you have assets or savings to offer as security, you may be able to get a larger loan amount.
Risks
Taking on an additional financial commitment as a pensioner on a limited income carries a number of risks.
- You could take on too much debt. Can you manage to make regular repayment instalments on your limited income? Could you cover groceries, rent, and other monthly bills on top of your loan repayment every month? If the answer is no, you are at risk of getting into financial difficulty in the future.
- Interest rates may be higher. Risk-based pricing, which looks at various factors including credit score, income, and age, is increasingly common. This means that a prospective customer with a higher risk profile, i.e. a pensioner, pays more interest to offset the bank’s risk. If you have a good credit score and some assets to offer as collateral for your personal loan, you may be able to get lower rates of interest on your pensioner personal loan.
- Fees could be higher. Another way lenders try to recoup potential future losses is by charging a high establishment fee on personal loans.
- Extra documentation required. Lenders need documentation to prove claims made in any application, but will likely require additional proof from pensioner applicants, including:
- Pension income
- Proof of other income
- Assets you own
- Bank statements
- Debts
If you think all that sounds rather invasive, it is. But that is how things work when you try to get a personal loan on a pension or other limited income.
Alternatives
A personal loan may not be the most desirable and affordable way to access additional funds when you are on a pension. The following alternatives carry varying levels of risk.
Pension Loan Schemes (PLS)
People of pension age, who are eligible to get or are already on an Age pension, can apply for Pension Loan Schemes. These are paid as fortnightly payments, not a lump sum.
You need to repay the loan amount together with some legal costs and interest accrued on the loan. How much you can get depends on your pension rate. The loan amount cannot exceed 1.5 times (150%) of your maximum pension rate.
To be eligible, you or your partner must own Australian real estate with appropriate insurance that can be used as security. People who are subject to a personal insolvency agreement or are bankrupt are not eligible for PLS.
No Interest Loans Scheme (NILS)
Loans provided through the No Interest Loans Scheme are subsidised by the government. They are free of interest, fees, or charges. That means you only have to repay the same amount that you borrow.
To be eligible, you need a Health Care Card or a Pension Card and are earning less than $45,000 a year. You need to have lived at your current or last address for at least 3 months.
You can borrow up to $1,500 for between 12 to 18 months. A NILS loan can be used to pay for car repairs, medical and dental bills, and to buy essential items like home appliances or a laptop and text books for educational purposes. They cannot be used to pay for food, other bills, rent, debt repayment or for other living expenses.
You can access NILS via 170 local community organisations spread across 600 locations around Australia.
Centrelink Cash Advances
This is an option if you get regular payments from Centrelink. Remember that this service just enables you to draw on the money you get as an advance and is not in addition to your pension amount.
Eligibility depends on how long you have been with Centrelink as well as how much you get and the type of payment. People who have been getting an Age Pension, Carer Payment, Disability Support Pension, Farm Household Allowance, JobSeeker Payment, Parenting Payment, Widow Allowance or Youth Allowance for job seekers for at least 3 months are eligible to apply. There are also limitations on who can get Centrelink cash advances and for how long. Find out more at Services Australia.
Bank account overdraft
There are several key differences between a personal loan and using a bank account overdraft.
You need to get approval from your bank for an overdraft on your transaction account before you can use the funds.
The good thing is that you only have to pay interest on the overdraft amount, once fees and charges are paid for. This is an option for when bills are due but you know you will be short on cash for a while.
Redraw from home loan
A home loan redraw facility works by letting you withdraw any extra repayments that you have made over and above the required minimum repayments on a home loan.
You can even consider a home loan redraw facility as a place to park your extra savings. When you do this, instead of earning interest like a savings account does, it effectively reduces the interest you need to pay on your home loan. Any additional repayments that you make on the home loan go towards boosting your 'available redraw', which you can draw on whenever you need some extra cash.
Reverse mortgage
A reverse mortgage works by letting you borrow money using the equity in your home as the security. People over the age of 60 can borrow up to 15–20% of the home value. This amount increases as you grow older.
As a rule of thumb, add a 1% for each year of your age over 60. If you are 65 you can borrow about 20 - 25% of the value of your home as a reverse mortgage.
What you draw on a reverse mortgage is not counted as a type of income, and should not affect your pension.
Conclusion
Now that you are aware of the pros and cons of personal loans for pensioners and what other alternatives you have to get some extra cash for your needs, carefully consider your options before making a final decision.
