Can you get a personal loan when you’re retired?

Whether you’d like to cross off a bucket-list item, improve your standard of living, or simply pay for an emergency expense that you weren’t expecting, you might wonder if you can get a personal loan as a retiree. The first part of the answer is yes, retirees can take out personal loans—but there are some things you should know. Here’s what to consider when applying for a personal loan after retirement.

Can you get a personal loan as a retiree?

Retirees can obtain personal loans, yes. Just because you’ve formally retired doesn’t mean that lenders will be hesitant to lend to you. Their chief concern is that you can repay what you owe. In other words, if a financial institution is confident that you can take on a monthly payment, the fact that you’re retired shouldn’t affect your odds of approval.

Banks don’t tend to publish hard minimum income amounts to qualify for a loan, though some do. Instead, they typically place more focus on your debt-to-income ratio (DTI).

You can calculate your DTI by dividing your total debt payments each month (installment loans, auto loans, credit card minimum payments, etc.) with the gross amount of money you receive each month. Each lender has its own tolerance for an acceptable DTI, which we’ll get into later.

If you’re a retiree, your income may not be as straightforward as when you were receiving a steady paycheck with a full-time job. So what exactly counts as “income”? Let’s take a look.

What income can you claim as a retiree?

Retirees may have multiple streams of income that lenders will count as available funds that can be used to repay a loan, with some examples including:

• Social Security
• Pension
• Retirement distributions—payouts from accounts such as a 401(k) or IRA
• Regular annuity payments (often requiring proof that the payments will last for at least the next three years)
• Investment income—interest/dividends from stocks, bonds, and mutual funds which also may require a couple years of reliable payouts

Of course, if you still work, you should factor income into your total income amount too.

What income can you not claim as a retiree?

There are a handful of “earnings” that you may think would be an eligible source of income but in fact are not. Common examples include:

• “Household” income: Unless you apply with a cosigner, you cannot use any other income from those living with you—including your spouse.
• Non-cash public assistance: Receiving funds for housing or food cannot be used for consideration when applying for a personal loan.
• Reverse mortgage payouts: This is a type of home equity loan that can be structured to give you monthly payments. You can’t claim loan payouts as a way to repay another loan.
• Unofficial work: Doing work under the table won’t boost your loan-eligible income. For example, if your neighbor pays you $50 to help him move, you can’t count it on your loan.
• Unemployment benefits: It’s possible that you can include unemployment if you’re involved in seasonal work that doles out these payments annually—but for the most part, unemployment is temporary and won’t be considered when applying for a loan.

How to improve your personal loan approval chances as a retiree

Improving your chances of being approved for a personal loan as a retiree isn’t radically different from any other demographic. Keep these things in mind to have the best shot at an approval (and favorable terms).

Improve your credit score

Your credit score is one of the most important details a financial institution considers when analyzing your creditworthiness. For a large selection of lenders and reasonable interest rates, you’ll typically need a credit score that at least meets the “good” threshold—which generally means a FICO Score of at least 670. If you don’t currently have a good credit score, concentrate on the following:

• Always pay current loans, credit cards, etc. on time
• Reduce your credit utilization on your revolving accounts (the rule of thumb according to experts is less than 30% of your total available credit)
• Avoid multiple hard credit inquiries leading up to your loan application (in other words, don’t apply for several credit cards a few months before you plan to open a new loan)
• Don’t cancel current credit cards, as it can increase your utilization and eventually lower your average age of accounts

Each of these steps can positively improve your credit score to varying degrees. On-time payments and a low credit utilization carry the most weight.

Lower your debt-to-income ratio 

Again, lenders consider your DTI to be one of the most telling aspects of your profile in terms of your ability to repay a loan. For this reason, you should put in effort to lower your DTI as much as possible before submitting your application.

In general, you’ll want to shoot for a debt-to-income ratio of 40% or less. It’s possible to be approved with a higher DTI, but you may receive less favorable loan terms.

Lenders pay close attention to your debt-to-income ratio, as it’s an indicator of whether you can afford to take on another monthly loan payment. It can also help them discern your financial responsibility. Many lenders prefer a DTI of 40% or less.

Lower your DTI as much as possible before you open a loan. For example, if you’ve currently got another installment loan, try to pay that off to eliminate a monthly payment from factoring into your DTI.

Get a cosigner

If you’ve got a cosigner on your loan, their credit profile will also be considered and the income they receive will be counted as a source of repayment. This can dramatically improve your chance of approval.

However, the cosigner is responsible for the loan if you are unable to pay. Late payments or defaulting on the loan will wreck both credit profiles. Be sure to have a frank discussion with your potential cosigner about your plan to budget for the monthly payments you’ll have to make to stay current on the loan.

Consider a secured loan

A secured loan is generally easier to qualify for—but it’s also riskier.

Remember, a bank may hesitate before extending a loan to you if it suspects it may lose money. Offering collateral can minimize the bank’s risk. For example, you might be able to use your car, jewelry or collectibles as collateral.

But, if you fail to repay the loan, the bank can take possession of the collateral and sell them to repay what you owe.

Alternative financing options for retirees

As a retiree, there are other ways to finance a purchase other than a personal loan. Here are some popular options:

• Low-APR credit cards: High interest rates make credit cards a poor option for large purchases that can’t be repaid within a few months. But some credit cards offer lengthy intro APR periods that waive interest for nearly two years in some cases. Opening one of these cards for your purchase can potentially be an even better deal than opening a personal loan.
• Personal line of credit: A personal line of credit oftentimes comes with similar interest rates and maximum amounts to what you’d find with a traditional personal loan. The big difference is how you access the funds. Personal lines of credit work similarly to a credit card in that you can spend and repay your loan as often as you like (often for years before you’re required to repay any outstanding balance). You’ll also be subject to variable APR—instead of fixed APR with an installment loan.
• Home equity loan: If you own property, you may be able to borrow from the equity you’ve built in your home. It works similar to a personal loan in that you’ll receive a lump sum upfront that you’ll pay back in monthly installments. They also typically come with lengthier repayment periods and higher amounts. Just note that your home is serving as collateral and can be taken by the bank if you don’t pay back your loan.
• Cash-out refinance: Another option for homeowners is to open a new mortgage that is larger than what you owe. You can extend your repayment timeline and perhaps even receive lower APR and monthly payments—but by requesting more than you owe, you can pocket the remainder of the loan and use it for whatever you like.
• 401(k) loans: If you’re still a full-time employee and your employer allows, you can likely borrow from your retirement savings. The interest you pay will be deposited into your retirement account. Just note that if you leave a job, you may have to pay back the whole loan at once. Also, it’s important to ensure you’re taking a loan and not a withdrawal, as early withdrawals from retirement accounts will trigger expensive penalties.

Of course, you may also choose to borrow money from friends or family and repay them without the hassle of formal credit checks, interest, and documentation requirements. But, have a serious conversation before doing this, and ensure you’ve got a solid repayment plan in place to avoid damaging relationships.

The takeaway

It’s absolutely possible to get a personal loan while retired. The biggest factors are your credit score and your debt-to-income ratio. If your credit score is 670 or above and your DTI is 40% or below, you should be eligible for most personal loans. Of course, no one is guaranteed approval— but you’ll be on a solid foundation in this situation.

Frequently asked questions