When a person who is on a fixed income is struggling to make ends meet, where do they turn? They are not able to pick up extra hours at work, or pull a side job. Often, retirees are stuck. They are physically too weak to work and earn some more money, but they do not have enough coming in from their retirement pension to cover their needs. This has caused some to turn to pension advance loans. A loan that may sound quite familiar, and downright troublesome.
Just like everyone, retirees have times when big bills or expenses come up, but the income from the pension pays out too slowly. For instance, large medical bills could come at the same time as appliances failing. Unlike buying a new car, or traveling, these are not items you can save up for and buy when desired. Instead of socking the money away, some retirees are turning to a pension advance company. They will then take 5 or 10 years worth of their pension upfront, and then they will use some or all of their pension payments to pay off this loan. It sounds like a good deal on the surface, but digging deeper it may not be too different from a payday loan.
Through deceitful marketing, these companies can often get around usury laws. By claiming these are not loans, but rather repayment programs, the industry is highly unregulated. The borrower ends up paying back much more than they actually borrowed, to the tune of many thousands of dollars.
Take for example Dr. Kroot. Medical bills and home repair problems ended up causing this retired military doctor to be in a sudden need of over $100,000. There is no way he could cover it with savings, so he turned to a pension advance company. The company gave him a little over $91,000 in return for 8 years of pension payments. The paperwork made no mention of what the equivalent interest rates would be, but by the time the 95 month term is over, the Kroots will have ended up paying more than $242,000 for their $91,000 loan. This is the equivalent to paying 30.7% in annual interest.
These companies have some fancy paperwork to get around laws that usually govern lenders. They claim to be purchasing pension payments in a lump sum. So instead of lending you the money, they are buying the money from you. This means they do not need to go through all the disclosures that usually accompany loans, and unless you do the math you will not clearly see how much the money costs
To make sure they get their money they go through some less than reputable means. As the borrower you are required to set up a new checking account (to which the company has access). Your pension deposits now go into this account. Once you realize you are being taken advantage of, you are pretty stuck. Your paperwork also gives the company power of attorney to make changes to the account and the pension. If you try to revoke it, stop the payments, or change the payments, you could be on the hook to change your 8 year repayment plan to a 10 year repayment plan (costing you thousands more in charges since your monthly payments don’t go down, but your term extends). On top of these nefarious means of acquiring the money, the company will also force you to purchase a life insurance policy and name them as beneficiaries. This way if you die before the term is up, they still get their money.
The bottom line is these are borderline scams. Many of the companies are being sued and the state of New York is investigating to see if they are even legal in that state. If you are a retiree, or know of one who has talked about pension advances, understand what is ahead. These “loans” are devastating those who are already on a fixed income. By using an industry that is barely regulated, these pension advance companies are making a lot of money off people who cannot really afford it. If you have been taken advantage of, or fear you have, you can get in touch with the Consumer Financial Protection Bureau. They do not monitor these types of loans, but they can offer some advice on where to turn.