Although avoiding loans is the best policy to maintain your financial health, a person may need to take out a loan at any point of time due to unforeseen eventualities or to grab a lucrative opportunity.
“When it comes to living your life to the fullest, age should definitely not be a barrier. In the past, conventional wisdom dictated that for equity allocation you must follow the 100-age approach. So, if you were 30 years old then you could allocate 70 per cent of your portfolio to equities and if you were 60 years old, then you could allocate only 40 per cent to equities. Over a period of time, both investors and financial advisors discovered that the basic premise that as you get older you should reduce risk was flawed. There are a host of factors that impact an individual’s ability to take risk, and age is just one of them. We see these kinds of biases everywhere. It is most evident in the case of personal loans,” said Prithvi Chandrasekhar, President – Risk & Analytics, InCred.
As repayment capacity is the main factor that determines one’s eligibility to take loans, with their reduced employability, eligibility of retired persons dips.
“Generally, when it comes to personal loans, lenders prefer to avoid lending to retirees. Of course, there is a credible rationale behind this reticence. Generally, a lender would look at the ability of the borrower to repay the loan. This means that lenders would prefer borrowers who have a steady source of income, thereby being assured that the borrower will be able to make the repayment. Inarguably, retirees might not be the best suited demographic for a personal loan. However, one must not preclude the entire segment from access to personal loans,” said Chandrasekhar.
Opining that ‘age is no bar’ in taking a personal loan, Chandrasekhar explains the nitty gritties of the loan taking process of a retired person –
Why take a personal loan after retirement?
Requirements might change with age but they continue to prevail. Further, emergencies don’t see the age before striking. Retirees also have several needs which can either sometimes be sudden in nature or might not be optimally met with the savings at hand. It could also be the case that there is a funding gap, i.e., while the individual has sufficient funds invested, the funds might not be available at that particular time.
A customised solution
Clearly, retirees can also have the need for personal loans. Thus, it becomes incumbent upon industry players to envisage unique solutions that can proactively cater to this demand. While retirees might not have the same income as they did in their prime earning years, it would be remiss to assume that retirees don’t have any income at all. Retirees, in fact, can have several sources of income.
Some of these include:
- Pension income
- Income from investments
- Income from retirement plans
- Income from investments in real estate
- Income from post retirement entrepreneurial activities
These sources of income should not be ignored by lenders. On the other hand, lenders take into consideration the income that retirees generate and then accordingly assess their ability to repay the loan. Inevitably, they will find that a large segment of this population is well-positioned to service EMIs. From a retirees perspective, it might be better to approach lenders that offer bespoke products that tend to niche segments like personal loans instead of approaching the larger banks.
The only caveat here is that retirees must themselves be responsible and avoid taking personal loans unless they are sure of their ability to repay. After all, no one wants the added stress of loan repayment, especially in their retirement years.