Debt-to-income ratios among people over 65 years old have risen since the recent recession. Predatory lenders, specifically advance pension lenders, are targeting retirees with military, federal and state pensions who are struggling to make ends meet.
Pension advances are loans and may also be referred to as pension sales or buyouts. In return for a lump sum payment, the pensioner signs over all or some of his monthly pension checks for a period of time, usually five to 10 years. For those who need cash in a hurry, the deal may not seem unreasonable. However, the transaction usually includes fees and additional costs, like the purchase of a life insurance policy to guarantee the loan, which can push the effective annual percentage rate up to anywhere from 25 to 100 percent.
If you’re considering a pension advance loan, the Better Business Bureau offers the following tips:
• Check with your pension administrator to see if it is against the law to sign over your pension.
• Ask the lender to put the APR and all costs and fees, such as commissions and life insurance premiums, in writing.
• Get the lender’s cancellation policy in writing.
• Seek the advice of a tax adviser to see if the loan will have tax implications.
• Research the lender to see if complaints have been filed against the company. You can search for complaints by contacting the BBB at www.bbb.org and the Washington state attorney general’s office at www.atg.wa.gov/ContactUs.aspx.
• Research alternatives to pension advances. Check with credit unions, banks and other small loan companies for their short-term loan rates. Some credit cards might offer competitive rates on cash advances. Compare all available offers by their APR, finance charges and repayment terms.
• If you are having difficulty paying your bills, contact your creditors and loan servicer to ask for more time. The sooner you ask, before you get behind, the more likely your creditors will be to work with you. When creditors and loan servicers do offer you an extension, be sure to ask about any associated fees.
• Consider talking to a credit counselor. For more information, check out the advice at the FTC’s Consumer Information webpage: Choosing a Credit Counselor, at http://1.usa.gov/Uzsq57.
For more tips you can trust, visit the BBB at www.bbb.org or call (509) 455-4200.
Erin T. Dodge, BBB editor