Personal Finance

Pros and cons of loan against pension

K Venkatasubramanian | Updated on February 17, 2019

While it may not be the most suitable option for pensioners, it does help meet emergency requirements

You start taking it easy in life after early or regular retirement from government service with a pension income to take care of your financial needs, and adequate savings and insurance for the rainy day. That would be the ideal scenario.

But imagine a situation post-retirement wherein you do not have adequate savings and face a situation where your children’s education or wedding funds have a shortfall even after exhausting your accumulated corpus. Or, there may be a scenario where having retired early and chosen not to touch your accumulated kitty earmarked for your silver years or your recently made investments, you face a money gap that needs to be bridged for children’s goals or financial emergencies.

Another scenario could be when you are forced to opt for a non-network hospital to get yourself or your spouse admitted for treatment, and you are forced to claim a reimbursement instead of getting a cashless claim. In such a case, you will need to pay the expensive medical bills upfront, and the lack of emergency funds or liquid savings will mean that you would need a loan.

To tide over such a situation, apart from options such as loan against deposits, you can consider taking a person loan against your pension to tide over the crisis. While a personal loan may not be the most suitable for pensioners, it does help meet emergency requirements.

Here, we look into the personal loans on offer from major banks in terms of eligibility, limits, repayment schedules and interest rates. We have also suggested a few tips to optimise the use of such loans and pitfalls to avoid.

Sizeable loans

If you have retired from Central/State/Defence agencies or government universities or colleges, and draw a pension, you are eligible for personal loans from banks. Mostly, only public sector banks offer such loans, though a few private sector financial institutions offer them as well.

SBI, PNB, Union Bank, Dena Bank, Vijaya Bank and Bank of India, among others, offer personal loans to pensioners.

Typically, 10-18 times the monthly pension is offered as the loan amount. For Defence pensioners, the multiple can go up to 20 times. Many banks have a total limit on the loan based on the age of the pensioner. For those less than 72 years of age (75 in some cases), the loans available are for ₹5-14 lakh. Beyond 75, the loan eligibility typically halves.

For family pensioners (the spouse of the main pensioner), too, the loan eligibility is restricted to about ₹5 lakh in most cases. The repayment tenure for different banks ranges from 24 to 60 months. For early retirees, the repayment tenure in specific cases can go up to 84 months.

Generally, you can apply for a personal loan only in the same branch where your pension is credited, as EMIs are deducted from your pension.

Managing the debt

While opting for a personal loan, you must keep certain factors in mind so that you don’t get into a debt trap.

The interest rate is usually 200-250 basis points more than the MCLR (marginal cost of lending). Presently, this translates to 11-12 per cent interest across public sector banks. The rates are certainly not low. Keep the borrowings to the bare essential, to fill only critical shortfalls. Avoid the temptation of exhausting your entire eligibility limit.

You should ensure that the EMI does not account for more than 25-30 per cent of your monthly pension. Banks themselves have an EMI threshold while sanctioning loans — 33-50 per cent of the pension amount — but that is on the higher side.

Repay the loan as and when you get a surplus. For example, if your earlier investments generate substantial profits in certain years, book profits and use the amount to repay the loan early.

Another important aspect to note is that in case you have an EMI, say on a personal or home loan, running into your retirement, you must completely avoid taking on another personal loan, given the high interest rate and large EMIs that it entails.

Encourage your children to take education loans for their higher education and save yourself the debt burden. Avoid taking personal loans for consumption-related reasons, such as taking an international holiday.

More than anything else, goal-based financial planning is critical in avoiding debt in your retirement years.

Published on February 17, 2019

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