In a standard loan, you’re making a deal with the lender to get money now with the promise of gradually paying it back, plus interest. With a pension advance loan, cautions the FTC, you’re giving the lender the income you will need to live on for the longterm. And, of course, the amount you receive in the lump sum is less than the total amount you would have earned from the pension over the long haul.
Additionally, the FTC warns that these advance loans often come with substantial fees that effectively push the interest rate past 100%, drastically sapping value from the loan.
And then there’s the requirement on some pension advance loans that you take out a life insurance policy, naming the lender as the beneficiary. While this insures that the debt will be repaid if something happens to you, it also means more money out of your pocket every month.
The FTC recommends that anyone considering a pension advance loan ask the following questions before agreeing to one:
• Are you eligible? Not all pensions are eligible to be signed over to another party, and in some cases it may be illegal. Check with your pension administrator for details.
• What are the costs? Not all lenders are transparent in their marketing, or even in their contracts, about the actual APR for their pension advance loans. Be sure to ask the lender for the full APR, which is based on several things, including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your contract. Also ask in advance if there are any additional costs or fees, including commissions and life insurance.
• Do you have to buy life insurance? Being required to add a life insurance policy can tack on quite a bit of money to the total cost for your advance loan. Every dollar spent on insurance is another dollar of value drained from the advance.
• What are the tax implications? That wad of cash you get from the lender in exchange for access to your pension could push you into a higher tax bracket. Again, this means that you’re getting less value out of the advance.
• Can you cancel the transaction? Not all pension advance companies let you cancel once you’ve completed the deal. Make sure you ask the company about its cancellation policy, before you sign the contract.
• Are there complaints about the company? The FTC advises you check with your local consumer protection agency, your state Attorney General’s Office, and the Better Business Bureau to find out if any complaints have been lodged against the company offering the advance.
Rather than risk your retirement income on an advance loan, the FTC recommends talking to a local credit union about a loan. At the very least, do some comparison shopping of all available pension advances in order to find the one that is the most beneficial.
If you’re in debt, talk to your creditors to see if you can make payment arrangements that will not require you to take out an advance against your pension.
The FTC also offers advice on finding a non-profit consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget.