Unsecured loans for the over 55s - are they worth it? | moneyfacts.co.uk

Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 23/07/2020

A new type of unsecured loan specifically for those over the age of 55 has recently been launched by loans broker Free2. Those who are retired and have an income through an annuity or a final salary pension and own their home can now apply for loans of up to £150,000.


This new type of loan joins a range of specialist lending options usually only available to the over-55s, including equity release, later-life mortgages or retirement interest-only mortgages. However, secured loans and unsecured personal loans can also be accessed by the older borrower.


Older borrowers can apply to lenders through Free2 for loans of between £5,000 to £150,000 for a term of five to 20 years. Borrowers will need to be aged between 55 and 70, with the loan term finishing before the borrower reaches the age of 75. Unlike equity release, these loans do not require the borrower to use their home as security. However, borrowers will need to make regular fixed monthly repayments, while equity release requires no repayments to be made while the borrower is alive and living in their home.


Subject to certain terms and conditions, if the borrower dies before the unsecured loan is repaid, then the loan is written off, whereas other forms of secured lending such as equity release or a later life mortgage will always need to be repaid.


Moneyfacts has looked at the personal loans currently available and found the largest loan currently available is £50,000, however this is only available to the existing customers of Barclays Bank, HSBC, first direct, NatWest, Royal Bank of Scotland and TSB. For those who don’t bank with these brands, then the maximum is £35,000 for existing customers of Lloyds, Halifax and Bank of Scotland, while £30,000 is the maximum available from RateSetter, Clydesdale Bank and Yorkshire Bank. Loans of £25,000 are more universally available with 40 lenders offering these to existing and new customers.


Moneyfacts.co.uk has reviewed the eligibility criteria, specifically for pension income and maximum age restrictions, of 10 lenders – all of whom allow loans of £12,500. We found that in the majority of cases, lenders will accept those that are retired or with a pension income and only two lenders had a maximum age limit by which the borrower had to repay the loan. This was 75 for Tesco Bank and 70 for AA.

Summary of lenders and maximum ages and pension income accepted

Lender

Pension income accepted and maximum age restrictions

Cahoot

Retired is an option for income on application

TSB

Need to be employed or retired with a pension

John Lewis

Pension income is allowed

MBNA

Paid employment or regular income – pension not stated specifically

Tesco Bank

Regular income is allowed including a pension, borrowers must be under 75 at the end of the loan

Santander

Retired is an option for income on application

AA

Regular income required and no older than 70 when the loan ends

HSBC

Pension income allowed; minimum of £10,000 income required

Post Office

Retired is an option for income on application

NatWest

Allows pension income

Borrowers also need to make sure that they meet the lender’s full eligibility requirements, including credit history and score, loan purpose and minimum earning requirements.

Check you are eligible for a loan before applying

Borrowers can check which lenders are most likely to accept them for a personal loan without affecting their credit score using a loans eligibility service.

For the ovre-55s, a personal loan is cheaper for smaller, shorter loans

Borrowers could save over £300 over the life of a £12,500 five-year loan by choosing the best personal loan rate from Cahoot, compared to the over-55s loan from Free2. A £12,500 five-year loan for a 55-year-old non-smoker, would cost £254.42 from Free2 with an APR of 8.47%, while Cahoot offers a cost of £223.30 per month and an APR of 2.80%. Borrowers that are older than 55 can expect the cost of the Free2 loan to increase, with a 60-year old non-smoker being charged £257.27 (8.98% APR) for the same £12,500 loan.


Borrowers can work out the cost of their loan repayments using our loan calculator.

Those over-55 wanting a larger loan can get a better rate from a secured loan

Borrowers could save over £10,000 by taking out a secured loan compared to the unsecured loan from Free2. A £50,000 loan for a non-smoking borrower over a 15-year term would cost £459.93 per month at 7.63% APR from Free2. The best rate for a secured loan of the same amount is from Paragon Bank at 5.4% APRC with a monthly cost of £402.49, saving borrowers £10,339 over the 15-year term. Borrowers will have the risk of losing their home if they fail to make repayments and their estate will need to repay this debt if they die before it is paid back in full. The unsecured loan presents neither of these risks, but this comfort does come at a significant expense.

What are the other borrowing options for homeowners aged over 55?

Those that want to borrow more than £30,000 and/or over a longer term than five years, will likely need to consider an alternative to a personal loan.


A remortgage is still an option for those aged over 55, with an increasing number of lenders now issuing mortgages to those into their sixties and seventies. The lender will need to check that the mortgage is affordable and will need to know how you intend to pay for the mortgage if this takes you into your official retirement.


Those that still have an existing mortgage and don’t want to change their existing mortgage deal, can consider a secured loan. Different lenders will have different rules on maximum ages and income types. For example, Paragon Bank states borrowers must be no older than 60 years old at application and if employed their loan must end no longer than five years after the borrower’s stated retirement age. This lender does accept retired applicants subject to confirmation of their pension income and meeting the required affordability tests.

Remortgage rates are usually lower than those available on secured loans, but secured loan rates are still competitive, with the top 10 product rates ranging from 3.40% to 4.45% on a £50,000 15-year loan. Borrowers need to remember that a secured loan is a charge against their home and this will be at risk if they do not keep up their repayments.


At this age and loan amount, borrowers could also use a lifetime mortgage (a form of equity release) and be allowed to release an average of 20% of the value of their home at an average APR of 4.34%. This would not require a monthly payment unless the borrower chooses to do this when they take out the lifetime mortgage.


Borrowers should be careful of the costs of equity release as interest is accrued every year and added onto the original amount borrowed. This means over time interest is compounded and can mount up over many years. Borrowers also need to check that their choice of equity release includes a no negative equity guarantee and be prepared that the value of their estate will be reduced.

Equity release FAQs

Find out how equity release works and read our equity release FAQs.

Advice when borrowing is important at any time of life

The unsecured loan for the over-55s is also available without any advice or requirements for involvement from the borrower’s family. Regulation mandates that those wanting equity release receive qualified, professional advice and while this is not the case for mortgages, the majority of those getting a mortgage will do so after receiving advice. No matter what the borrower’s age, advice that helps the borrower to confirm that a loan is right for them and the type of loan they need is highly important.

Alternatives to borrowing

Those aged over 55 can also consider drawing down up to 25% of their pension tax-free. By doing this, the value of their pension will be reduced, but the remaining pension fund has the opportunity to grow if the stock market performs. There is some risk in this approach as the stock market may also decline, reducing the remaining pension fund further.


Those with sizeable savings could choose to spend some of these instead and save in interest costs. Savers should be careful not to leave themselves without an emergency fund, may incur penalties if withdrawing from fixed term accounts and lose the tax-free status of their money if withdrawing from an ISA.

Disclaimer

Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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