What Are Disability Loans, And How Do They Work? – Forbes Advisor

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If you’re disabled or applying for disability benefits, you might 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 public assistance.

The bad news is that you’ll still need to qualify for the loan based on your own credit and income, and that can be challenging for some people with disabilities. Even worse, in some cases, taking out a loan can impact your eligibility for benefits.

We’ll take a look at what options are available for you and how they might impact your disability benefits. That way, you can make the best decision for your situation.

What Is a Disability Loan?

There isn’t an 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 that they use to pay for living expenses and tide themselves over until they’re approved for disability benefits.
  • For others, a disability loan might be used to purchase equipment such as wheelchair ramps or mobility scooters.
  • Still, other people refer to a disability loan as any loan you take out, for any purpose, while on disability benefits.

Types of Disability Loans

Any type of loan can be a disability loan, depending on your definition. Here are some different types of loans that people can take out if they’re disabled:

  • 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 any asset 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 available to help disabled people buy homes. For example, veterans who are disabled because of service-related injuries may qualify to have the funding fee waived on a VA loan.
  • Auto loans. Some lenders, such as Bank of America, offer special types of car loans to buy vehicles modified for people with disabilities.

How to Get a Loan on Disability

If you’re already receiving disability benefits, the way you apply for a loan won’t be any different than for anyone else. Here’s how it’ll work:

  1. Shop for rates. Most lenders will allow you to check your rate and loan options with them without hurting your credit score. This also can let you know whether you’re likely to be approved for the loan. If you’re disabled, shopping around is especially important since some lenders might have more stringent minimum income requirements than others.
  2. Apply for the loan. Once you’ve found a loan option that’ll work for you, go ahead and complete your loan application in person or online.
  3. Receive your funds. Depending on your lender, you might receive the funds via direct deposit or check.
  4. Repay the loan. A good tip is to set up autopay. That way you won’t have to remember to make the payments each month yourself.

Can I Get a Loan While I Wait to Be Approved for Disability Benefits?

In 2021, it took an average of around five months to be approved for disability benefits. That’s a long time to wait to receive benefits, especially if you’re disabled and not earning any other income. So, some people opt for loans to tide them over.

However, this may be difficult and not a great idea. If you apply for a loan, a lender will judge your application based on your ability to repay right now, not five months from now. And if you’re not earning any income presently, then you aren’t likely to be approved for a loan.

Another reason why it’s risky to take out a loan at this point is that, unfortunately, around two-thirds of disability benefits claims are denied the first time. Thus, there’s a chance that you’d be signing up for a loan that you wouldn’t be able to repay right away anyway.

That doesn’t mean you’re out of luck though. Instead, check with the Social Security Administration, because they have several programs that can help you out financially while you wait for a decision on your loan, such as presumptive disability payments. Best of all, if you receive benefits through this system and are later denied, then you won’t have to repay those funds unless they overpaid you. You won’t have the same luck with a loan.

Loans for People on Disability With Bad Credit

It will be harder to get approved for a loan if you have bad credit and your only income is from disability. Lenders can’t deny you just because you’re receiving disability payments, but they can deny you because your credit score might not be high enough and your disability payments might not be enough to meet their income thresholds.

Some lenders will let you apply for a loan with a co-signer. This is someone who agrees to repay the loan in case you’re not able to do so. If you’re not able to qualify based on your own credit or income, having a co-signer with a higher income level and/or a higher credit score can mean the difference between having your loan approved or denied in some cases.

But remember, this isn’t a decision to make lightly. If you default on the loan, it will force your co-signer to repay it, and that can break their trust. Good relationships are worth more than money, so only use a co-signer if you’re confident you can repay the loan.

How Do Loans Impact 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 aren’t counted as income for 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 that you have no more than $2,000 in assets ($3,000 for married couples).

If you’re on SSI, you need to plan your loan carefully. If you don’t spend your entire loan in the month you receive it, those funds will count towards the $2,000 asset limit. If you’re above that, you could lose your benefits for that month. So, it’s best to apply for the loan toward the end of the month so that by the time it’s paid out near the beginning of the next month, you have more time to spend the money. This will keep your benefits safe.

Alternatives to Disability Loans

It’s especially important to know that if you’re disabled and need extra money, a loan and/or disability benefits are not your only options. There are plenty of other avenues to look down for 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 afford housing as a disabled person, whether you’d like to live in an apartment or need help buying and maintaining your own home.
  • Food assistance. If you’re on disability benefits you most likely qualify for help paying for your food through the SNAP program as well.
  • More assistance. 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. It’s a service run by the United Way to help connect community members with the specific help they’re looking for.

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