Disability Loans: What Are They and How Do They Work?

Loans for people on disability can be great tools for bridging the financial gap between applying for government disability benefits and being approved, which can take months. But like any borrowed money, personal loans come with potential risks to consider.

Knowing how personal loans for disability work can help you decide whether they’re the best option for you, or whether you should skip them for more flexible alternatives.

What are disability loans?

A disability loan may refer to any type of financing you can use to cover necessary expenses like groceries, bills or mortgage payments if a disability has rendered you unable to work. Personal loans are one option. They allow you to receive funds quickly and spread the payments out over periods ranging from two to seven years.

Disability loans can be a financial lifesaver if you need short-term funds while you’re waiting for Social Security Disability Income (SSDI) to kick in. Funds can be paid off early without penalty, so you’re not saddled with an extra monthly payment on a fixed income.

How disability loans work

Loans for people on disability work the same as any regular personal loan. You’ll find them at banks, credit unions, online lenders or marketplace sites such as Bankrate.

You’ll need to fill out an application, usually online. Approval depends on a review of your income, credit score and credit history. Rates for excellent credit borrowers may be as low as 6.5 percent, while bad credit rates can be as high as 35.99 percent.

Some lenders charge origination fees as high as 12 percent of your loan amount, which are typically taken out of your loan proceeds, while others offer no-fee loans. Lenders typically offer lower annual percentage rates for terms of three years or less, but if you’re on a fixed income, a longer term may mean more affordable payments.

Lenders can often fund personal loans within one business day of approval, giving you access to funds much faster than other types of credit (like home equity loans or HELOCs).

Types of disability loans

Most personal disability loans are unsecured, meaning you don’t need an asset like a home or car to get approved. Secured options are more common with banks and credit unions, although some online lenders may offer specialized secured options.

Unsecured personal loans. This type of loan doesn’t require any collateral. However, lenders limit the loan size they will approve based on your credit score and income. Many lenders cater to all types of credit backgrounds with unsecured loans. However, unsecured loans’ APRs can run as high as 35.99 percent if your credit is poor, and terms are typically capped at seven years, which could make the payment unaffordable.

Secured personal loans. With a secured loan, the lender may offer lower rates and longer terms knowing they can repossess your car or foreclose on your home if you default. Banks and credit unions may offer the most competitive rates and terms, often with no fees. And with terms sometimes as long as 15 or 30 years (for loans secured by your home), the payment may be much more affordable.

Before applying, find out if you qualify for emergency advance payments

The SSA offers advanced disability payments to qualified individuals based on the severity of their condition, the type of disability they have and how likely they are to be approved for disability benefits. You should find out if you’re eligible for these emergency advance payments before applying for a disability loan.

Also known as presumptive disability or blindness payments, they help fund the gap for up to six months between the application and approval in emergency situations. Unlike disability loans, they only need to be paid back in the case of over payment, and you won’t be charged interest or fees.

You will need to prove you are currently in an emergency situation to qualify, and the advance payments you receive will be subtracted from the amount you’re set to receive in disability.

How to apply for a disability loan

You can apply for a disability loan through an online lender, bank, credit union or marketplace matchmaking site like Bankrate. With an online or marketplace lender, your application will likely be processed quickly, and it may be the easiest way to find funding. However, if you’re a credit union member or have used a certain bank before, you may want to see if your current financial institution offers discounted fees or rates to their customers.

Compare top personal loan lenders before applying for a disability loan to find the best offer for your financial situation. Many online lenders now offer prequalification tools that allow you to see if you meet the eligibility requirements before applying to help you avoid a hard credit check on a loan you may not qualify for.

Pros and cons of disability loans

Disability loans can be useful if you have an immediate need for emergency funding to make ends meet. However, they should be a last resort if you are able to secure other forms of low-cost financing that won’t put a strain on your monthly budget.

Pros

• Quick funding: With some lenders, you can get approved within minutes and complete the application process from home.
• Multiple lender options: You have a plethora of lenders, banks or credit unions to choose from when it comes to finding a loan that works for you.
• May cover emergencies: If you’re unable to work and are waiting for your application to be processed, disability loans fill that gap.

Cons

Alternatives to a disability loan

If you don’t meet the eligibility requirements or don’t want to take out a long-term loan, there are alternatives to help cover expenses while waiting for your disability application to be processed — or if you do not qualify for disability benefits.

• Government assistance: Includes programs like cash assistance, SNAP and welfare and unemployment benefits. You can apply for government assistance and see if you qualify with your state’s human service or social services agency.
• Worker’s compensation: You may be eligible for workers’ compensation if you have a work-related injury or illness. The process for filing a claim may differ from state to state, so research the process and complete all necessary steps. Also, depending on your state’s regulations, you may be eligible for additional disability benefits if your injury has deemed you unable to work.
• Credit card cash advances: A cash advance is a form of credit card debt, and the money you borrow must be repaid. But the interest rate for cash advances is much higher than your regular credit card APR, so this can be an expensive option. With that in mind, cash advances are accessible and can be done at an ATM or through a bank that offers advances.
• Disability insurance: Disability insurance pays a portion of your income if you are disabled and unable to work. There are two forms: short- and long-term, which come with different amounts of coverage and waiting periods. You may be able to sign up for an employer-sponsored plan or buy an individual plan from a broker or insurance company.
• Loans from families or friends: As a last resort, you could ask a trusted friend or family member to lend you money for necessities. If you choose this method, keep in mind that it could cause rifts in the relationship if you’re unable to pay them back when promised.

Bottom line

After considering your options, if you decide that a disability loan is a route you should take, ensure you have a solid plan in place and the money to pay down the loan. It’s also important to find the lender that offers you the best rates and terms for your financial needs.