Disability loans: what are they and how do they work?

Disability loans can be useful tools to bridge the financial gap between applying for government disability benefits and receiving approval – which can take months in some cases. However, disability loans come with some potential risks, and these loans are not suitable for everyone.

If you’re considering applying for a disability loan, you should be aware of what they are, who qualifies, and the factors that may or may not make it beneficial to your financial situation.

What is a disability loan?

A disability loan is a personal loan that you can use for necessary, everyday expenses such as groceries, bills or mortgage payments if your disability no longer allows you to work. These loans are used as a short-term financing tool for the few months it takes the Social Security Administration (SSA) to process your application, and they should not be used as a substitute for disability benefits.

Emergency advance payments

Before applying for a disability loan, check whether you qualify for an emergency advance. The SSA offers advanced disability benefits to qualified individuals based on the severity of their condition, its type and how likely they are to receive approval for disability benefits. These payments, also known as presumptive disability or blindness payments, help finance the period of up to six months between application and approval in emergency situations. Unlike disability loans, they only have to be repaid if an overpayment has been made and there are no interest rates.

To qualify, you must prove that you are currently in an emergency situation, and the payments will be refunded by subtracting the amount of emergency advance you received from the amount you would receive if disabled.

If you don’t qualify for emergency placement, you can look into disability loans.

Types of disability loans

Your options for disability loans include secured and unsecured personal loans from banks, credit unions and online lenders.

• Unsecured personal loan: A personal loan that does not require collateral. Because no collateral is required, your approval and borrowing limit are heavily influenced by your credit score and financial health.
• Secured personal loan: A personal loan that requires the lender to place a lien on the borrower’s collateral, often a vehicle, home, or other asset of significant value. The lender can seize the asset as payment if the loan is not repaid. With secured loans, the lender assumes a low financial risk, which makes this type of loan easier to qualify for and the borrowing limit is usually high.
• Payday Loans: A short-term loan that is repaid on the borrower’s next payday or when their monthly SSA benefits are received. The loan limit varies, but the typical payday loan amount is $500. Depending on the lender, you may be able to renew or extend the loan if you cannot repay it by the due date. However, since these loans have an annual interest rate that can be as high as 400%, you should only use them as a last resort.

Who is eligible for a disability loan?

Because a disability loan is a personal loan, approval will be based on the lender and your financial history. Eligibility requirements vary from lender to lender. If you don’t meet the requirements, most lenders allow you to apply for a cosigner to increase your chances of approval. Your interest rate is partly determined by your credit history, so the better the score, the lower the interest rate.

Disability loans are not processed through the SSA like disability benefits. Instead, disability loans are through a private lender. Therefore, they should only be taken out as a last resort if you have a repayment plan to pay off the balance. Keep in mind that it may not be the best idea to rely on disability benefits as a way to pay off your loan, as the government could deny your claim.

Before applying for a loan, make sure you have already filed for disability through the SSA, as the loans are a short-term solution and not a long-term solution.

How does the government determine who is eligible for disability?

After completing the online appthe SSA decides who is eligible for disability benefits using a process that takes five months and includes the following five questions:

1. Are you working? If you are currently working in 2024 and your average monthly earnings are greater than $1,550 or $2,590 for blind applicants, you likely do not qualify as disabled.
2. Is your condition considered ‘serious’?? To qualify, your condition must be severe enough to limit your ability to work and perform basic physical work-related tasks for at least 12 months.
3. Is it on the list of disabling conditions?? The SSA has a list of medical conditions who are eligible for disability benefits. If your condition is not listed, it is up to the SSA to decide if it is serious enough to qualify.
4. Can you still do the work you used to?? You are not eligible if you can still complete your work with your medical disability(s).
5. Do you have the opportunity to do other types of work?? If you become disabled, the SSA will consider factors such as your age, fitness level, education and previous work experience to determine whether you are able to obtain another job. If not, you may be eligible for benefits, but you may be denied if you could successfully perform other work.

How to apply for a disability loan

You can apply for a disability loan through an online lender, bank or credit union. With an online lender, the application process is usually completed entirely online and can be the fastest and easiest way to get the money you need. However, if you are a member of a credit union or have used a particular bank before, you may want to know if that financial institution offers discounts or rates to their customers.

Compare lenders before applying for a disability loan to find the best offer for your financial situation. Many online lenders now offer pre-qualification tools that let you see if you meet eligibility requirements before you apply, so you can avoid a hard credit check for a loan you may not qualify for. Pre-qualifying for a loan does not guarantee that the lender will approve your loan application.

Advantages and disadvantages of disability loans

While any type of emergency loan can be a convenient way to get the money you need when you need it quickly, there are still drawbacks you should consider before applying.

Positives

• Convenience: Some lenders allow you to get approved in minutes and complete the application process from home.
• Options: You have a plethora of lenders, banks or credit unions to choose from when it comes to finding a loan that’s right for you.
• Quick relief: If you can’t work and are waiting for your application to be processed, disability loans fill the gap.

Cons

• Potentially high interest rates: Depending on your credit, you could be stuck with high interest rates, potentially leading to high-interest debt.
• Payday Risk: Many payday loans are marketed to people with disabilities, but they typically have astronomically high interest rates that can leave you in debt for years.
• Short repayment terms: Depending on the lender, you may get a shorter repayment term, which means you can have a larger monthly payment with a shorter repayment term than other types of debt.
• Risk of losing collateral: If you put up collateral and cannot repay your loan, you risk losing that asset to the lender.

Alternatives to a disability loan

If you do not meet the eligibility requirements or do not want to take out a long-term loan, there are alternatives to help finance the processing time of your disability application:

• Government support: Includes programs such as cash assistance, SNAP, and welfare and unemployment benefits. You can apply for government assistance and see if you qualify the human service or the social service of the state.
• Work compensation: You may be eligible for workers’ compensation if you have a work-related injury or illness. The process for filing a claim may vary from state to state, so research the process and complete all necessary steps. Depending on the regulations in your state, you may also be eligible for additional disability benefits if your injury makes you unable to work.
• Cash advances: A cash advance is a short-term loan that allows you to use your credit card to borrow the money you need. This can be done at an ATM or through a bank that offers advances. Cash advances are a form of credit card debt, and the money you borrow must be paid back. Keep in mind that the interest rate for cash advances is much higher than your regular credit card APR, so this can be an expensive option.
• Disability insurance: Disability insurance pays out part of your income if you are disabled and cannot work. There are two types: short-term and long-term, with different coverage amounts and waiting periods. You may be able to sign up for an employer-sponsored plan or purchase an individual plan from a broker or insurance company.
• Loans from family or friends: As a last resort, you can ask a trusted friend or family member to lend you money for necessities. If you choose this method, keep in mind that it can lead to rifts in the relationship if you are unable to pay it back as promised.

it comes down to

If, after considering all your options, you decide that a disability loan is a route you should take, make sure you have a solid plan and the money to pay off the loan. It’s also important to make sure you do your research to find the lender that will offer you the best rates and terms for your financial needs.