When you are on a fixed income, there are several factors to take into consideration when deciding on the best loan for your situation.
Are the payments affordable? Will you qualify for the loan with your income or credit score? How quickly are you able to pay it off? Will the loan lead to more debt – or will it improve your monthly finances?
We take a look at the pros and cons of some of the most commonly available loans for retired Canadians.
Rates for personal loans can vary greatly (between 5-14%), depending on the lender and what you already owe, your credit score and your income.
Terms can be for up to five years and you will need to make monthly payments until your loan is paid off.
If you have a low income, high debt or low credit score, you may not qualify for a personal loan.
Some web-based lenders specialize in lending to people on government subsidies and pensions. They offer terms of 1-2 years, but interest rates can be as high as 50%. You are approved on your monthly income (including pension or investment income), not your age or credit score.
Lines of credit
Rates for lines of credit are based on the prime rate plus an additional percentage.
Home Equity Lines of Credit (HELOCs) are secured against your home and offer the best rates, often 0.5% above prime. Unsecured (personal) lines of credit charge rates as high as 9% above prime.
Some retired Canadians struggle to get a line of credit because qualifying depends on your credit score, income and current debts.
These loans are for fairly small amounts and charge high fees. You’ll pay between $15-$23 per $100 borrowed, depending on your province (with annual interest rates as high as 1,199%). You usually have to pay the loan within two weeks.
Many Canadians are turning to payday loans several times a year and getting into a vicious cycle of debt. They should only be considered as a last resort, if at all.
Home equity loans/private second or third mortgages
You may also be able to borrow off the equity in your home, i.e., the appraised value minus what you currently owe (in mortgages or other liens).
People who cannot get a loan from a regular bank or other financial institution because of low income and/or poor credit may be able to secure this type of loan. If you have built substantial equity, it may be possible to borrow large amounts but be warned: they can be very expensive.
Interest rates can be between 8 and 20% and you may have to pay lender’s and broker’s fees of that can be between 2-4%. You must pay at least the interest every month and pay off the loan in full at the end of the term or negotiate a new loan or mortgage.
The CHIP reverse mortgage
This is an equity loan for Canadians aged 55 and over only.
For many retired Canadians on a limited income, this is the most attractive loan available, because regular mortgage payments are not required. The loan, plus accrued interest, is only payable when you move out or sell your home.
Interest rates are considerably lower than most personal loans and lines of credit and much lower than credit cards, payday loans and private equity loans.
Some clients may also find it much easier to qualify for.