Although avoiding loans is the best policy to maintain your financial health, a person may need to take out a loan at any time due to unforeseen contingencies or to seize a lucrative opportunity.
“When it comes to living life to the fullest, age should definitely not be a barrier. In the past, conventional wisdom dictated that for stock allocation, you should follow the 100-year approach. So if you were 30 you could allocate 70% of your portfolio to stocks and if you were 60 you could only allocate 40% to stocks. Over time, investors and financial advisors discovered that the basic principle that as you age you should reduce risk was wrong. There are a host of factors that affect an individual’s ability to take risks, and age is just one of them. We see this kind of bias everywhere. This is most evident in the case of personal loans,” said Prithvi Chandrasekhar, President – Risk & Analytics, InCred.
As repayment capacity is the main factor that determines eligibility to take out loans, with their reduced employability, the eligibility of retirees drops.
“Generally, when it comes to personal loans, lenders prefer to avoid lending to retirees. Of course, there is a credible justification behind this reluctance. Generally, a lender will consider the borrower’s ability to repay the loan. This means that lenders would prefer borrowers who have a stable source of income, thus being assured that the borrower will be able to make the repayment. Arguably, retirees may not be the demographic best suited for a personal loan. However, the entire segment should not be prevented from accessing personal loans,” Chandrasekhar said.
Believing that “age is no barrier” to taking out a personal loan, Chandrasekhar explains the details of the process of taking a loan from a retired person –
Why take out a personal loan after retirement?
Requirements may change with age, but they continue to prevail. Also, ER doesn’t see the age before it hits. Retirees also have several needs that can sometimes be sudden in nature or not optimally met with the savings at hand. There may also be a funding gap, i.e., even if the individual has enough funds invested, the funds may not be available at that particular time.
A personalized solution
Of course, retirees may also need personal loans. Thus, it behooves industry players to consider unique solutions that can proactively meet this demand. Although retirees may not have the same income as in their peak earning years, it would be remiss to assume that retirees have no income at all. Retirees, in fact, can have several sources of income.
Some of them include:
- retirement income
- Investment income
- Income from pension plans
- Income from investments in real estate
- Income from entrepreneurial activities after retirement
These sources of income should not be ignored by lenders. On the other hand, lenders take into consideration the income generated by retirees and assess their ability to repay the loan accordingly. Inevitably, they will discover that a large part of this population is well placed to serve IMEs. From the perspective of retirees, it might be better to approach lenders who offer tailored products that tend towards niche segments like personal loans instead of approaching the big banks.
The only caveat here is that retirees should be responsible themselves and avoid taking out personal loans unless they are sure of their ability to repay. After all, no one wants the added stress of paying off a loan, especially in retirement.