Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Aug 3, 2021

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A pension loan gives borrowers a lump cash sum in exchange for a percentage of the borrower’s future pension payments. The loan is usually paid back in monthly installments. Consumer advocate groups warn against pension-advance loans because they charge high interest rates. They may also have serious tax penalties.

Why would a borrower take out a pension-advance loan? Sometimes, they’re taken out to deal with unexpected financial emergencies. Other times, they’re used to pay for large investments like a down payment on a house. Borrowers may think it’s easier than a traditional loan, but in some ways, it can be more complicated.

What Is A Pension?

A pension, also known as a defined benefits plan, is a type of retirement plan often granted to civil servants. Police officers, firefighters, teachers, and military employees usually qualify for pension plans. The amount paid to each pensioner depends on how many years the employee worked for their employer and what the employee’s salary was at the time. Retirees can choose between a lump-sum or monthly payments.

Other companies used to offer pensions. Some organizations such as Cummins still do. It’s generally an alternative to retirement plans offered by most private employers in the US, and the employer takes on the bulk of the contributions.

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How Do Payments on A Pension Loan Work?

If you withdraw money from your pension fund early, you will pay tax penalties. In some plans, it may not be possible to withdraw money early without serious complications. This is part of why some borrowers use a loan instead of an early withdrawal from pensions or retirement funds.

A pension loan does not come directly from your pension initially. It is a high-interest loan given with the understanding that the pensioner will repay the loan with their pension. The pension is used as collateral, and it’s more common for borrowers with bad credit and limited assets.

Generally speaking, applicants who move forward with these high interest loans cannot qualify for conventional loans. They may not be able to get cash advances or personal loans for the amount they want. So they use pension advance transactions as collateral to increase the loan amount they’re eligible for.

Is A Pension Loan A Good Idea?

A report by the New York Times found that the average interest rate on a pension-advance loan was between 27 and 106 percent. Though the pension-advance industry does not have a set regulator, it may soon be investigated by both the Consumer Financial Protection Bureau and the Senate’s Committee on Health, Education, Labor and Pensions. Even compared to other high interest loans, some of the terms can be considered predatory. It is better to keep looking for a loan company that can offer a different alternative if you need financial assistance now.

Personal finance advisors also recommend against withdrawing pension and retirement funds early, specifically because the funds are meant to last the rest of a pensioner’s life. By tapping into that money early with a pension-advance loan, pensioners risk the stability of their golden years. Even if it’s temporary, it decreases the returns made throughout the life of your pension.

Scott Pooch, President of SW Pooch and Company, said in an email that pension plans are most effective as long-term saving strategies, not short-term quick fixes.

“Pension plans are an excellent way to save for retirement; they are a terrible way to save for emergencies that pop up a year or two down the road,” Pooch said. “The answer is a Peace of Mind account – a separate savings account only for emergencies that is funded through payroll deduction.”

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If you’re looking for money to deal with an emergency or purchase now, relying on military pensions, pension loans, and other related loans may not be the best option available to you. Enter your ZIP code below to view lenders with cheap loan rates. Even if other companies have told you no based on your credit scores or other factors, you may be surprised at the terms available to you with the right lender.