Pension Advance: A Dangerous Choice
NEW YORK (5/7/13)--Use future pension funds today! Convert your pension into cash! It sounds too good to be true--and it is. Offers known as pension advances are targeting retirees, primarily those with public pensions such as members of the military, veterans, teachers, firefighters, police and others (New York Times.com April 27).
Touted as advances, pension advances actually are short-term loans that require borrowers to sign over part of their monthly pension check in order to receive cash against their pensions. Polished websites disguise the fact that the product is a loan, according to Forbes (April 29). The companies operate largely outside of state and federal banking regulations. (See related article, "Retirees' Pension Advances Have High Rates" in Monday's News Now).
Pension advances are similar to payday loans in that interest rates are exorbitant relative to conventional loans--ranging from 27% to an astronomical 106%. To qualify for an advance, borrowers often must take out life insurance policies that name the lender as the sole beneficiary. As with other high-interest predatory loans, advances often trap users in a vicious debt cycle almost impossible to escape. Long-term costs often are hidden from the borrower.
By the time borrowers realize the transaction details, it's too late. One retired marine needed some fast cash; he agreed to sign over $353 of his $1,033 monthly disability pension for five years in exchange for $10,000 in cash up front from a pension advance company. The terms, including fees and finance charges came to an interest rate of more than 36%. Another veteran received a $42,000 loan at an interest rate of 26.8%.
If you're in a tight spot and need money, don't fall for scams that can evaporate your life savings--visit your credit union. The professionals there can suggest loan products with fair rates and terms that can help you get back on track.
Another option is to contact a National Foundation for Credit Counseling member agency certified counselor. Call 800-388-2227 to be connected to an agency in your area, or visit DebtAdvice.org.
For more information about unscrupulous lending practices, watch the video "Avoid Payday Lenders" in the Home & Family Finance Resource Center.