What are disability loans and how do they work?
IIf you are disabled or applying for disability benefits, you may need to borrow money. The good news is that the Equal Credit Opportunity Act prevents lenders from discriminating against you just because your income comes from government assistance.
The bad news is that you will still need to qualify for the loan based on your own credit and income, which can be difficult for some people with disabilities. Worse still, in some cases, taking out a loan can impact your eligibility for benefits.
We will review the options available to you and how they will affect your disability benefits. This way 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 generally used to describe a variety of loans and situations.
- For some people, a disability loan is the one they use to pay for living expenses and get by 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.
- Yet other people refer to a disability loan as any loan you take out, for any purpose, while you are on disability benefits.
Types of Disability Loans
Any type of loan can be a disability loan, depending on your definition. Here are different types of loans people can get if they have a disability:
- Personal loan. These can be small or large and secured (backed by an asset such as a car or bank account) or unsecured (not tied to an asset that the bank can take over if you fail to repay the loan). You can use personal loans for almost any expense.
- Mortgage. There are often special programs to help people with disabilities buy a home. For example, veterans disabled due to service-related injuries may qualify for waiver of finance charges on a VA loan.
- Car loans. Some lenders, such as Bank of America, offer special types of auto loans to purchase vehicles modified for people with disabilities.
How to get a disability loan
If you are already receiving disability benefits, the way you apply for a loan will be no different than anyone else’s. Here’s how it will work:
- Shop around for rates. Most lenders will let you check your rate and loan options with them without hurting your credit score. It can also let you know if you are likely to be approved for the loan. If you are disabled, shopping around is especially important as some lenders may have stricter minimum income requirements than others.
- Apply for the loan. Once you’ve found a loan option that’s right for you, complete your loan application in person or online.
- Receive your funds. Depending on your lender, you may receive the funds by direct deposit or by check.
- Repay the loan. A good tip is to set up automatic payment. This way, you won’t have to remember to make the payments yourself each month.
Can I get a loan while waiting to be approved for disability benefits?
In 2021, it took an average of about five months to be approved for disability benefits. It’s a long wait to receive benefits, especially if you’re disabled and earn no other income. Thus, some people opt for loans to help them out.
However, this can be tricky and not a good idea. If you apply for a loan, a lender will judge your application based on your ability to repay now, not in five months. And if you’re currently earning no income, you’re unlikely to be approved for a loan.
Another reason it’s risky to take out a loan at this stage is that, unfortunately, about two-thirds of disability benefit claims are turned down the first time. So, it is possible that you take out a loan that you would not be able to repay immediately anyway.
That doesn’t mean you’re unlucky, though. Instead, check with the Social Security Administration, as they have several programs that can help you financially while you wait for a decision on your loan, such as presumptive disability payments. Even better, if you receive benefits through this system and are later denied, you won’t have to repay those funds unless they overpaid you. You won’t have the same luck with a loan.
Loans for disabled people with bad credit
It will be harder to get approved for a loan if you have bad credit and your only income is from a disability. Lenders can’t deny you just because you’re receiving disability benefits, but they can deny you because your credit score may not be high enough and your disability benefits aren’t enough to reach their income thresholds.
Some lenders will allow you to apply for a loan with a co-signer. It is someone who agrees to repay the loan in case you are unable to do so. If you are unable to qualify based on your own credit or income, having a co-signer with a higher income level and/or higher credit score can mean the difference between approval or denial of your loan in certain cases.
But remember, this is not a decision to be taken lightly. If you fail to repay the loan, it will force your co-signer to repay it, which can break their trust. Good relationships are worth more than money, so only use a co-signer if you are sure you can repay the loan.
What is the impact of loans on 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 for either program, which is handy because if you earn too much, you could lose your benefits. If you are on SSI, you must take a means test each month to prove that you have no more than $2,000 in assets ($3,000 for married couples).
If you are on SSI, you need to plan your loan carefully. If you don’t spend all of your loan in the month you receive it, those funds will count toward the $2,000 asset limit. If you are above that, you could lose your benefits for that month. So it’s best to apply for the loan towards the end of the month so that by the time it’s paid off towards the start of the next month, you have more time to spend the money. This will keep your benefits safe.
Alternatives to Disability Loans
It is especially important to know that if you are disabled and need extra money, a loan and/or disability benefits are not your only options. There are many other avenues to seek help, including:
- ABLE savings accounts. These can help you save more money to increase your financial security, without affecting your eligibility for means-tested benefits like SSI.
- Housing assistance. There are many federal programs available to help you pay for housing as a disabled person, whether you want to live in an apartment or need help buying and maintaining your own home.
- Food aid. If you’re on disability benefits, you’re likely also eligible for food assistance through the SNAP program.
- 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 visiting 211.org. This is a service run by United Way to help community members find the specific help they are looking for.
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