Money talk: What Choices Do 60+ People Have?

Retiring without debt is what everyone wants. But what if you need to borrow while retired? In retirement, people typically have restricted income. Therefore, a loan would stretch their limited means. When lending, banks normally look at the income of the borrower and his age to ascertain his repayment capacity. Senior citizens — persons above the age of 60 — depend on their existing investments and pension to meet their day-to-day expenses. Therefore, they may find difficulty in servicing the burden of a sizeable loan EMI. However, it’s not that senior citizens don’t have loan options. Here are some of them.  

PENSION LOAN PRODUCT
Senior citizens draw their pensions from their bank accounts. Most banks provide pension loans to customers who hold an account in their bank from which they draw their pension. Usually, banks provide such loans to pensioners from the central and state governments, defence, as well as family pensioners, i.e. a person who is authorised to receive a pension after the death of the pensioner. The loan tenure allowed is up to 84 months, but this may vary from bank to bank. The loan amount depends on pension size, age of the applicant and the loan tenure. The interest rates on pension loans range from around 10 to 15 per cent per annum.

LOAN AGAINST SECURITY
Some senior citizens may not have a pension income. But they may have investments and securities. For them, a Loan Against Security (LAS) would be the go-to option. Under a typical LAS, the borrower needs to provide a collateral to the lender. Loan products under LAS such as loan against FD, mutual fund, National Savings Certificates, Kisan Vikas Patra, and life insurance policy (money back or endowment policy) are easily available through banks. For getting an LAS, senior citizen borrowers are required to pledge the qualified security with the bank. Usually, banks allow a loan of around 50 per cent against shares, 90 per cent against life insurance, 90 per cent against FD and similarly a definite percent against other eligible securities. For example, if a person pledges qualified shares with a market value of Rs 2 lakh, then the bank may grant him a loan of around Rs 1 lakh, i.e. 50 per cent of the shares’ value. The interest rates on LAS loans depend on the collateral. For example, if the security pledged is an FD, the bank usually charges 1 to 1.5 per cent above the FD’s interest rate. So if the FD returns 8 per cent, the interest rate on the loan would be around 9 to 9.5 per cent per annum. While applying for a loan against security, the bank may levy charges such as pledge creation fees, processing charges, AMC charges, and so on. Normally banks do not levy any pre-payment charges on loans against security. However, if you are transferring the loan to another bank, there may be a pre-closure fee or penalty.

LOAN AGAINST PROPERTY
Loans can be raised against immovable properties such as residential property. This is also a useful option for senior citizens who may be limited by income but have property at their disposal. The maximum age allowed for LAPs is restricted to around 70 years. This may vary from bank to bank. It means the senior citizen borrower must clear his EMIs before attaining the age of 70. LAPs should be used as a last resort because pledging your property to raise a small loan is not always advisable, and if you are planning to take a big loan, you find difficulty in the repayment of EMIs.

REVERSE MORTGAGE LOAN
As a senior citizen borrower, if you are looking for money to meet your day-to-day expenses, an RML can be a useful product. The minimum age to avail an RML is 60 years, and if it’s a joint loan with one’s spouse, the minimum age criterion is 55 years. Borrowers have the option to choose between a regular RML or an RML with annuity option (RMLeA). Under a regular RML, the borrower receives the loan as a lump sum or instalments as per the tenure. He has the freedom to not repay the loan till he’s alive. Under RMLeA, the borrower gets a pension through the insurer who annuitizes the corpus for the rest of the pensioner’s life without tenure restriction. The borrower must consult an advisor before going for the RML option. One should consider RML as an option after exploring all other available options including LAS and LAP.
Senior citizen borrower needs to be careful while applying for a loan. It’s important to assess how much they would be able to comfortably repay without impacting their lifestyle which should be focussed on health and stability. If they do borrow, they should borrow only as much as they need and not go overboard even if their loan eligibility is high.

— The writer is CEO, BankBazaar.com