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If you are disabled or applying for a disability pension, you may need to borrow money. The good news is that the Equal Credit Opportunity Act prevents lenders from discriminating against you simply because your income comes from public assistance.
The bad news is that you still have to qualify for the loan based on your own credit score and income, and that can be challenging for some people with disabilities. Worse, in some cases, taking out a loan can affect your entitlement to benefits.
We look at what options are available to you and how they may affect your disability benefit. So you can make the best decision for your situation.
What is a disability loan?
There is no official disability loan. The term disability loan is typically used to describe a variety of loans and situations.
- For some people, a disability loan is one they use to pay for living expenses and tide themselves over until they are approved for disability benefits.
- For others, a disability loan can be used to purchase equipment such as wheelchair ramps or mobility scooters.
- However, others refer to a disability loan as any loan you take out for any purpose while receiving a disability pension.
Types of Disability Loans
Depending on your definition, any type of loan can be a disability loan. Here are some different types of loans people can take out if they are disabled:
- private loan. These can be small or large and can be collateralized (backed by an asset like a car or a bank account) or unsecured (not tied to an asset that the bank can repossess if you default on the loan). You can use personal loans for almost any expense.
- Mortgage. There are often special programs that help people with disabilities to buy a house. For example, veterans who are disabled due to service-related injuries may be eligible for a VA loan financing fee waiver.
- car loans. Some lenders, like Bank of America, offer special types of auto loans to purchase vehicles that have been modified for people with disabilities.
How to get a disability loan
If you’re already on disability, the way you apply for a loan is no different than for anyone else. Here’s how it will work:
- Shop prices. Most lenders allow you to review your interest rate and loan options with them without hurting your credit score. This can also tell you if you are likely to be approved for the loan. It’s especially important to shop around if you’re disabled, as some lenders may have stricter minimum income requirements than others.
- Apply for the loan. Once you have found a loan option that is right for you, you can complete your loan application in person or online.
- Get your money. Depending on your lender, you may receive the money by direct deposit or check.
- loan repayment. A good tip is to set up autopay. That way, you don’t have to think about making the payments yourself every month.
Can I get a loan while awaiting approval for disability benefits?
In 2021, it took an average of around five months for a disability pension to be approved. That’s a long wait to get benefits, especially if you’re disabled and have no other income. Some people therefore opt for loans to bridge them.
However, this can be difficult and is not a good idea. When you apply for a loan, a lender will evaluate your application based on your ability to repay now, not five months from now. And if you’re not currently earning income, chances are you won’t get credit.
A loan at the present time is also risky because unfortunately around two thirds of IV applications are rejected the first time. Therefore, there is a possibility that you will take out a loan that you cannot repay immediately anyway.
But that doesn’t mean you’re unlucky. Contact the Social Security Administration instead, as they have several programs that can help you financially while you await a decision on your loan, such as: alleged disability payments. Best of all, if you get benefits through this system and are later turned down, you don’t have to pay those monies back unless they overpaid you. You won’t have the same luck with a loan.
Loans for people with disabilities with bad credit
It will be more difficult to approve a loan if you have bad credit and your only income is from a disability. Lenders can’t turn you down just because you’re receiving disability payments, but they can turn you down because your credit rating may not be high enough and your disability payments may not be enough to meet their income thresholds.
Some lenders allow you to apply for a loan with a co-signer. This is someone who agrees to pay back the loan if you are unable to do so. If you are unable to qualify because of your own credit or income, a co-signer with a higher income level and/or credit rating can mean the difference between your loan being approved or denied in some cases.
But remember, you shouldn’t make this decision lightly. If you default on the loan, your co-signer will be forced to pay it back and that can break their trust. Good relationships are worth more than money, so only use a co-signer if you are sure you can pay back the loan.
How do loans affect disability benefits?
The two most popular disability programs, Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI), may treat loans differently.
The good news is that loans don’t count as income under either program — which is handy because if you earn too much, you could lose your benefits. If you’re on SSI, you must pass a means test each month to prove you have no more than $2,000 in assets ($3,000 for married couples).
When you are on SSI you need to plan your loan carefully. If you don’t spend your loan in full the month you receive it, those funds count toward the $2,000 asset limit. If you are above that, you could lose your benefits for that month. It is best to apply for the loan towards the end of the month so that you have more time to spend the money before the payment is made at the beginning of the next month. In this way, your advantages remain secure.
Alternatives to disability loans
It’s especially important to know that if you have a disability and need extra money, a loan and/or disability benefit aren’t your only options. There are many other ways to look for help, including:
- ABLE savings accounts. These can help you save more money to increase your financial security without impacting your eligibility for means-tested benefits like SSI.
- Home help. There are many government programs to help you afford housing as a disabled person, whether you want to live in an apartment or need help buying and maintaining your own home.
- food assistance. If you are receiving a disability pension, you are most likely entitled to help paying for your groceries from the SNAP program also.
- More help. Navigating the maze of potential benefits available to you is confusing. You can get free, anonymous help from a real person in your community by calling 2-1-1 or by visiting 211.org. It is a service operated by United Way which aims to help community members with the specific help they are looking for.
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