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What Are the Pros and Cons of Pension Loans?

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  • Written By: Angela Johnson
  • Edited By: PJP Schroeder
  • Last Modified Date: 21 August 2014
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There are many pros as well as cons when borrowing against a retirement pension, and many people have considered pension loans or buyouts to gain access to immediate cash. The risk in taking out pension loans should be evaluated carefully because the money that has been set aside specifically for retirement could potentially become unavailable for future living expenses. A pension-backed loan allows a person to use his or her pension as collateral, and a pension buyout is when a pension holder sells all or a portion of the pension to an organization so they can receive the cash sooner.

In most cases, pension loans or pension-backed loans have low annual percentage rates, a major advantage when compared to other loan vehicles. Some people who wish to borrow against their pensions may not be able to use traditional loan vehicles because of bad credit or lack of collateral. If the cash is necessary for survival or for an emergency need, leveraging against future pension payments could be a good decision.

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On the other hand, there are many situation where it would not be wise to use future pension payments as leverage for current cash desires. In most cases, it is best to keep retirement funds available only for retirement. Using these funds for a risky business venture could leave a retiree with a dissolved pension fund and not enough money to survive on. Careful planning is essential when tapping into funds for retirement or even using retirement funds as collateral.

Pension loans can benefit a person when the loan percentage rate is lower or the same as the annual rate of return. This is essentially the same as borrowing with no interest because the interest that is accrued replaces the interest that is charged for the loan. In this scenario, the use of the funds can be a great benefit, especially if the funds are used for an investment purchase, such as a house. These loans typically require repayment within 15 years, although some require payback in as little as five years.

As with any major financial decision, it is best to consult a financial adviser or a financial attorney. Checking with financial regulation authorities is a wise course of action to ensure there is no fraudulent claim against the loan company offering the advance. Whether opting for a loan or a buyout, it is important to understand the laws and regulations and to research the entities offering these services.

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anon260442
Post 1

I was wondering if it was safe to take a pension loan. Can the provider take your money and never be heard from again?

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