Loans for Seniors With Bad Credit

Growing older never was for the fainthearted, but it takes exceptional courage to navigate those Golden Years with dents on your credit report and a need for cash. Chins up, graybeards. Loans for seniors with bad credit are not out of reach.

Better still, federal law is on your side. Lenders are prohibited from discriminating against applicants simply because of their age (or other demographics, such as race, religious faith, or gender).

“Seniors with troubled credit have a variety of loan options available to them,” says James Allen, CPA, CFP, and founder of Billpin.com. “These include personal loans, home equity loans, home equity lines of credit, debt consolidation loans, reverse mortgages, cash-out refinanced mortgages, and auto equity loans.

“Balance transfer credit cards may also be an option, but qualification can be more challenging with bad credit.”

Consumers trying to make ends meet on a fixed income face challenges particular to their stage of life, so it’s crucial to have a clear-eyed understanding of the loan’s purpose, as well as a solid plan for how it will be repaid. (No wishful thinking allowed.) Once that crucial homework is completed, you’ll have a better grasp of the options best suited to you.

Best Loan Options for Seniors With Bad Credit

In part because of anti-discrimination laws, the best loan options for seniors, even those with rocky credit scores, are not so different from consumers in their prime earning years. Let’s check them out.

1. Personal Loans

Traditional personal loans come chiefly in two varieties: secured and unsecured.

Unsecured loans are based entirely on the lender’s (typically a bank or credit union) confidence in the borrower’s ability to repay the debt. The applicant may be asked to describe the purpose of the loan — that’s fair — but even if the funds will be used to buy something tangible (a laptop to pursue a side hustle, for instance), what’s purchased will not become collateral for the loan.

“If you’re a senior with bad credit, it can be tough to get approved for a loan,” says Andrew Latham, CFP and director of content for SuperMoney.com. Regarding personal loans, he says, “These may come with higher interest rates due to your credit score, [but] they are often unsecured, meaning you won’t risk losing assets if you default.”

Secured loans, by contrast, are backed by collateral — something of value, such as investment funds — that guarantee the lender against loss.

Some lenders have loan programs geared toward seniors (retired and working), including seniors with problematic credit.

Key factors to weigh are the annual percentage rate (APR) that’s to be charged against the balance, whether the APR is fixed or variable, and the length of the payoff schedule.

Unsecured personal loans to borrowers with bad credit can be painfully high, approaching 36% in some cases. High interest charges can make it difficult to maintain a punctual payment plan, and late fees can be crippling. Keep all that in mind as you shop (and shop you must) for a suitable unsecured personal loan.

By contrast, secured personal loans, even for borrowers with bad credit scores, command friendlier terms, including lower APRs.

2. Home Equity Loan

The equity in your home — that is, the difference between what your dwelling is worth, and what you owe on it — can be used to secure a loan. Thus, the home equity loan.

Sometimes called a second mortgage, a home equity loan may be a viable alternative to an unsecured personal loan. It’s worth looking into if the difference between what your home is worth is at least 15% higher than your remaining mortgage. For instance, your home, purchased in 2010 for $150,000, now is worth $225,000. Thirteen years of mortgage payments have dropped your balance to $75,000. The equity in your home equals $150,000, significantly more than the 15% ($33,750) threshold.

Because a home equity loan is backed by the collateral of your house, the terms of the loan should be significantly more advantageous than those of an unsecured personal loan. However, your credit score and income will be weighed to ascertain your loan worthiness; you may have a gusher of home equity and still not qualify.

3. Home Equity Line of Credit (HELOC)

A variation on the home equity loan is the home equity line of credit (HELOC). A home equity loan is a lump sum paid all at once. By contrast, HELOC borrowers get a line of credit — that is, they borrow what they need as they need it — that uses their home equity as collateral.

HELOCs are designed to provide access to revolving credit, very much like a credit card. You can borrow against your available balance, pay it down, and borrow again.

During the application process, the lender will confirm the amount of equity in your home as well as investigate your credit score and income. Any combination of the three will affect the terms of your loan, or even your eligibility.

4. Debt Consolidation Loan

For anyone, but for those on fixed incomes especially, a debt consolidation loan for seniors is an effective way to bundle a collection of high-interest debts (assorted credit card balances, for instance) into a single loan with a single monthly payment, usually at a far lower interest rate.

The benefits are clear, SuperMoney.com‘s Latham says. “A debt consolidation loan … pays off your existing debt, leaving you just one monthly payment to manage.”

The downsides include having to pay loan origination fees, and the risk to your future financial life if you regard the new zero balances on your existing cards as a license to spend.

As Latham notes, “It’s crucial to understand that if the loan isn’t managed properly, it can lead to more debt.”

5. Reverse Mortgage

Advertisements make reverse mortgages sound like the best thing to happen to seniors since the FDA approved Viagra. After all, if you can’t trust Tom Selleck, trust has lost all meaning.

“A reverse mortgage can be a viable option for seniors who have equity in their homes and need access to cash,” Billpin.com‘s Allen says. “It allows homeowners to convert part of their home equity into loan proceeds, which they can use for any purpose.”

A reverse mortgage — also known as a reverse mortgage home equity conversion loan (HECM) — acts rather like a home equity line of credit. Equity in the home is leveraged on behalf of the homeowner, who gets access to cash otherwise locked up in the dwelling.

The good news for seniors with bad credit: HECMs involve no credit score checks.

Money received does not have to be repaid until the homeowner leaves the house, sells it, or dies. At that time, the loan comes due; most often, the balance (principle and interest that has been collecting since the first payout to the homeowner) is satisfied by proceeds from the sale of the house.

A reverse mortgage can be useful as an income supplement in retirement. Such a loan also could be tapped for medical or other unexpected expenses.

As with any financial decision, Allen cautions against the urge to rush in, no matter what Magnum says. “It’s important to remember that a reverse mortgage can be quite costly due to high upfront fees and interest rates,” Allen says, “and it can potentially leave your heirs with a hefty financial burden.”

As an alternative, Latham suggests exploring home equity investments, in which homeowners get a lump sum of cash for a share of their home’s future value. Borrowers ensure no monthly payments or interest charges; instead, the home’s future appreciation is shared, upon sale, with the lender.

If the idea of a reverse mortgage appeals to you, do the appropriate homework. Shop for the best terms on fees, closing costs, and interest rates.

6. Cash-Out Refinance

Seniors with significant equity in their homes may be tempted to consider claiming some of their investment with a cash-out refinance of their existing mortgage.

With a traditional cash-out refinance, borrowers replace their existing mortgage with a new one, and free up cash that was part of their equity.

Federal government programs sponsored by FHA and, for military veterans, the VA, are worth looking into. With Washington as the borrower’s backstop, applying and qualifying can be simplified.

With mortgage rates hovering around 7% — twice as high as in 2020 — the second half of 2023 might not be the best time to consider cash-out refinancing loans, especially if you scored one of those sub-3% pandemic-era mortgages. But if your need for cash trumps other considerations, the rate you pay on a cash-out refinanced mortgage is sure to be more attractive than with virtually any other loan.

7. Auto Loan

If there’s equity in it, your personal vehicle can be used as collateral for a loan. Similar to a home equity loan, a loan against your car’s equity allows you to cash out some of its value.

Seniors with bad credit who are willing to put their car on the line usually can expect to have their loan processed more quickly than other types of loans. Factors affecting the loan include the car’s current fair market value vs. what you owe on it, as well as your credit score and income.

Calculate carefully, Allen warns. “While this can be a way to get cash quickly, it’s important to remember that if you fail to repay the loan, the lender can repossess your car.”

To make bad matters worse, repossessions look terrible on a credit report.

Interest-Free Loan Options for Seniors With Bad Credit

Interest-free loans are out there, even for seniors with roughed-up credit. Included are cash advance apps, by-now-pay-later schemes, and balance-transfer credit cards. Here’s a look.

1. Cash Advance Apps

Cash advance apps lend small amounts of money — up to $500 — with no credit check. They will have a peek at your bank account deposit activity to reckon the upper limit of your loan.

Most cash advance apps charge zero interest and zero late fees; lenders make their money by charging fees and so-called tips. However, there are ways around these charges.

• Avoid apps that require a subscription, even if it’s tiny. You’ll have to remember to cancel when you no longer need their services.
• Skip the tip. It’s optional. And don’t feel guilty. They’re all doing fine.
• Plan ahead. Instant access has a cost, sometimes up to $10. If you can wait up to five banking days, you won’t pay for convenience.

Repayment is automatically set for the date of your next paycheck or benefits (Social Security, for example) payment. But you can reschedule; remember, there are no late fees.

2. Buy Now Pay Later

Seniors will no doubt remember buying things on layaway plans. Buy-now-pay-later (BNPL) works essentially the same way, except you get the item up front.

BNPL is a variety of short-term financing in which consumers take possession of their purchases and pay for them over time, usually without interest charges. Purchasers make a small down payment at checkout, then pay off the balance in a series of follow up installments spanning a few weeks or months.

3. Balance Transfer Credit Cards

Balance transfer credit cards are all the rage these days, for good reason. They’re popular with borrowers because issuers offer 0% introductory rates (for balance transfers and for qualifying new purchases) that last from 12 to 21 months. Issuers like them because they charge a small fee for balance transfers (3%-5%), and if the balances linger past the introductory period, interest rates shoot up to between 18%-30%.

Getting a reprieve from interest charges for nearly two years, or even one, can give shrewd borrowers time to eliminate their balances without taking two steps forward (principle payments) and one step back (interest charges).

Seniors with seriously damaged credit scores might not be able to qualify for a 0% card. However, they may get a balance transfer card with a limited-time lower interest rate than they’re currently paying.

High-Risk Loan Options for Seniors With Poor Credit

Predatory lenders are circling, always circling, and most often they serve only to make the life of a bad credit risk worse. So choose from these options only if you are absolutely, positively sure other pathways are completely blocked.

1. Payday Loans

Payday loans, also known as cash advance loans, are a category of short-term borrowing that involves high interest charges (typically 399% APR) and punishing fees for short-term periods, often no longer than two weeks.

Payday loans are quick and painless on the front end, which has appeal for borrowers who need a small chunk of money fast. Lenders don’t check credit scores, relying on the borrower’s next pay check or benefit payment to repay the loan and interest charges.

However, those who cannot fully repay the loan when it’s due often fall into a cycle of debt, taking out a second loan to repay the first, and a third to repay the second, and on and on.

2. Credit Card Cash Advance

Many issuers allow their cardholders access to ready cash by offering a cash-advance feature. Tapping the cash usually is as easy as visiting the local ATM. The downsides involve high interest rates that kick in immediately, the likelihood of bank fees, and cash advance fees.

Borrowing From the Kids

Desperate times call for desperate measures, the axiom goes. Most seniors who feel compelled to ask their children for financial help certainly have slipped into that category.

Understand this: It’s one thing to ask the kids for help in an emergency — that is, if this is most likely a one-off predicament you’re in — and if they have the means to assist. Maybe you’re still working and have been laid off. Or you or your spouse is ill and facing significant medical bills. Or something crucial needs repair — the car, the air conditioning, the roof, and your emergency fund is tapped out.

Parents with unhealthy spending habits — gambling, shopping addictions, excessive dining out or travel — should have the good sense not to ask their kids to support their lifestyle choices. Their children should do them the favor of refusing.

Also, the terms should be clear. Is the money a gift, or a loan? If a loan, the terms should be specific, written, and agreed to in the presence of a third disinterested party, such as a bank officer, a lawyer, or a notary public.

“While it might be tempting to lean on family for financial help,” Allen says, “it’s crucial to consider the potential strain on relationships. Always weigh the pros and cons of each option and calculate the total cost (including hidden costs) before making up your mind.”

One alternative, says Young Pham, a financial advisor and wealth management professional with BizReport, is to enlist someone with better credit as a cosigner on a loan.

“When a senior has a cosigner on a loan application,” Pham says, “it means that someone with better credit and a stable financial situation agrees to take responsibility for the loan if the primary borrower (the senior) is unable to repay it. Having a co-signer reduces the risk for the lender, making it more likely for the loan to be approved and potentially at more favorable terms.”

Debt Relief Help for Senior Citizens

Seniors with bad credit who are interested in curing their financial woes rather than hiding them with a band-aid would do well to contact a nonprofit credit counseling agency to learn about debt relief options.

Credit counselors are well-versed in helping people in all walks of life, including seniors, overcome the sense of desperation and hopelessness that comes from overwhelming financial trouble.

Not only are they well-versed in various topics, including budgeting, cost-cutting, and debt consolidation, counselors also can identify the right matches for seniors needing financial assistance.

Making contact by phone or internet is free, as are consultations, and there’s never any obligation. So, get busy getting your finances in order, senior, because you still have a lot of living to do.