Many senior citizens live on a limited income, relying on Social Security benefits and retirement savings rather than income from a job. And while that might be enough to cover basic living expenses, it doesn’t always leave room to pay for debt acquired before or during retirement.
The good news is seniors in debt have options. Several forms of debt consolidation are available for seniors, as well as additional resources designed to help aging individuals.
Debt consolidation is when you combine multiple debt accounts into a single debt. It involves taking out a new debt to pay off all of your existing loans and credit cards. Moving forward, you’ll have just one debt and one monthly payment, ideally at a lower interest rate.
Here are some reasons seniors may want to consider debt consolidation to help them pay off what they owe:
| Note: Because you’re opening a new debt account, debt consolidation could have a negative, short-term impact on your credit score. However, you should see it bounce back quickly as long as you’re making on-time payments. |
If you’re a senior wondering how you can consolidate your debt, you have plenty of options, which we’ll cover in the upcoming sections.
A personal loan is an installment loan that typically has a fixed interest rate and payment term. Personal loan amounts generally range from as little as a few hundred dollars to as much as $100,000, with terms ranging from one year to seven years.
Personal loans tend to be unsecured, meaning they aren’t backed by collateral like your house or vehicle. While this can sometimes result in a higher interest rate, you can typically qualify for a lower rate if you have a good credit score.
| Pros | Cons |
|---|---|
A home equity loan allows you to consolidate your debt by taking advantage of the equity you’ve built in your home. Often referred to as a second mortgage, this type of installment loan lets you borrow money by using your home equity as collateral.
For example, let’s say you owe $200,000 on your mortgage and have $100,000 of equity. You could take out a home equity loan of $50,000. You now owe $250,000 on your home and have $50,000 of remaining equity.
Because home equity loans are secured loans, they usually have more competitive interest rates. But they also put your home at risk if you can’t make your payments.
Keep in mind that to take out a home equity loan, you’ll need to have a decent amount of home equity to begin with, and many lenders will only provide loans up to 80% or 85% of that amount.
| Pros | Cons |
|---|---|
A home equity line of credit (HELOC) is similar to a home equity loan in that you’re borrowing against the equity you have in your home. But in the case of a HELOC, you aren’t taking out an installment loan. Instead, a HELOC is a line of credit that, like a credit card, you can borrow from again and again, up to your credit limit.
HELOCs typically have two parts: the draw period and the repayment period. The draw period may last for between five and 15 years. During this time, you can borrow and repay the money as you choose. During the repayment period, you can no longer borrow money and are simply repaying what you still owe.
| Pros | Cons |
|---|---|
A reverse mortgage is a borrowing tool specifically designed for seniors. When you take out a reverse mortgage, you borrow against the money in your home. You can receive the money in a lump sum or in the form of monthly payments.
But unlike with a home equity loan or HELOC, the loan is repaid when you pass away or move out of the home. In many cases, a borrower’s heirs end up repaying the loan with the money acquired from selling the home.
| Pros | Cons |
|---|---|
The options discussed above can help you consolidate your debt as a senior, but they may not be right for everyone. Here are a few other ways to get out of debt and get your finances under control, even on a fixed income:
Do you feel like you need a bit of extra help on your debt payoff journey? Some senior-specific resources can help you take control of your finances, pay off your debt, and reach other financial goals.
Federal and state-sponsored programs exist to help seniors with their finances. For example, the Medicare Savings Program helps seniors pay their Medicare premiums and possibly even their deductibles, coinsurance, and copayments.
Another example of a government program designed for seniors is the Administration on Aging, which promotes the well-being of seniors and helps them live independently.
Neither of these programs directly helps seniors with their debts. However, both provide services that support the overall well-being and financial health of seniors, which can trickle down to other areas of their lives, including debt.
If you’re having a difficult time managing your debt yourself, consider working with a credit counseling service or debt management program. Credit counselors can advise you on your finances and help you get your debt and other areas of your budget under control.
One service offered by many credit counselors is a debt management plan. This type of plan helps set up an arrangement to pay off your debt in a more sustainable way. The credit counseling agency works with your creditors to negotiate your payments and interest rates. You make one payment to the credit counseling agency each month, and they distribute it to your creditors.
Unfortunately, this industry is rife with predatory services and fraudulent individuals. Make sure you know exactly what you’re signing up for to avoid a scam. Look for nonprofit organizations that charge either low or no fees. And check industry experts like the National Foundation for Credit Counseling (NFCC) to make sure the company you’re considering is accredited.