A person seeking a loan might be required to provide collateral — usually a non-cash asset — to secure the loan. This allows the lender some security against the loss of too much money if the borrower defaults on the loan. In some cases, a lender may allow a borrower to use a pension as collateral.
A pension is a financial plan in which a person receives a set amount of money periodically over a period of time. Many pensions are indefinite, but some are only provided for a set period of time. A pensioner is generally guaranteed payment of a pension unless the employer goes bankrupt or the pension is otherwise nullified.
Collateral is an asset that a lender has the right to seize if the borrower defaults on the loan. If a pension were used as collateral, the lender would be granted the right to the pension in the case of default. According to the Center of Public Integrity, a borrower may legally designate a pension as collateral, but he should be sure he understands the terms of the loan before doing so.
While some banks accept pensions as collateral, other lenders do not. This is because a pension — unlike physical assets such as automobiles or real estate — is not yet accessible. There is no guarantee that funds will remain in the pension at some future date when the borrower might default on the loan. If the pension fund ceases to exist, the lender will be left without protection in the event that the borrower defaults.
In some cases, a pension may not be allowed as collateral due to a prohibition explicitly established by the pension manager. Many plans do not allow people receiving the pension to borrow against them before they have received money from the plan. According to the Oklahoma News, if you are considering using your pension as collateral, you should have the plan and the loan contract reviewed by an attorney.
Michael Wolfe has been writing and editing since 2005, with a background including both business and creative writing. He has worked as a reporter for a community newspaper in New York City and a federal policy newsletter in Washington, D.C. Wolfe holds a B.A. in art history and is a resident of Brooklyn, N.Y.