Are Pension Advances Dangerously Disguised Loans?

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A largely unregulated industry is pitching loans with interest rates as high as 106 percent to retired firefighters, police officers, and others receiving a pension.

More older Americans are being pitched loans that require borrowers to sign over part of their pension checks, The New York Times says. These loans can come with interest rates far exceeding those on credit cards.

Such loans are called pension advances, but are really more like payday loans for people who don’t have paydays anymore. The loans are putting instant cash in the hands of retirees, but also can put them deeper in debt.

That’s particularly troubling for people between the ages of 65 and 74, who the Federal Reserve says make up the group with the fastest growing level of debt.

Pension advance companies are targeting veterans and other retirees who receive pensions —  including teachers, firefighters and police officers — by promising cash right now in exchange for a portion of future pension checks. Prior to the recession, such companies focused their marketing mainly on veterans, suggesting the money could be used for luxuries like a dream vacation or a yacht, the Times says.

Interest rates on the loans examined by the Times varied from 27 percent to 106 percent when all fees and costs were factored in, and were not disclosed in ads or contracts.

In some cases, a life insurance policy with the lender as sole beneficiary is required to qualify for a pension advance.

Some companies insist that their products are advances and not loans in order to skirt state laws that cap interest rates. In the case of veterans, companies sidestep a law about how military pensions can be used by having customers set up separate bank accounts solely for the pension advance repayments.

These companies are subject to very little regulation but are beginning to draw the attention of Congress and the Consumer Financial Protection Bureau, the Times says.

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