How to apply for a Bridging Loan against a Pension Payout
The safest way to ensure you do not incur any unnecessary fees or interest is to ensure that your pension fund has approved your claim and is in the process of payout before you apply for the bridging finance. This lessens the risk and you will be able to reasonably anticipate how long you will need before you can pay back the loan.
Application process
Check with your pension administrator for estimated payout timelines.
Find a Bridging Finance Company
Look for lenders that specialize in pension bridging loans. These are specialist companies that deal with bridging loans and would typically also provide pridging loans against assets like homes or other valuables like Gold coins or other expensive items that are easy to liquidate.
Interest rates for bridging loans can be high, so compare the offers from different bridging finance providers. The very nature of these lenders is to provide answers quickly, so you should be able to get a few offers in a very short space of time if you have all of the information and required documents ready.
Understand the repayment terms and fees
Read the terms and conditions and be sure that you understand what the additional costs and fees are should there be a delay in the payout, a payout refusal or any other specifically mentioned circumstance.
Provide Required Documents
- ID document (South African ID or passport)
- Pension fund confirmation letter (proof that funds are due)
- Bank statements
- Proof of residence
These are the basic documents required. Requesta complete list of required documents from each lender.
Loan Approval & Payout
Once approved, the lender advances a portion of your expected pension payout. The amount depends on the lender’s policy and how much you are due to receive which is calculated as a percentage of the payout amount while factoring in the risk.
Loan repayment
One of the documents you sign will allow the lender to be repaid directly from your pension payout once the fund is released. If there are delays in your pension payout, additional fees may apply. It is critically important to understand what the fees are and the terms and conditions are.
Only use a registered lender, In South Africa, the Financial Sector Conduct Authority (FSCA) is the statutory body responsible for registering pension fund bridging lenders, in compliance with the Pension Funds Act. You can check whether or not the lender is registered by visiting the FSCA website and doing a member search. This will tell you the status of the company.
Risks & Considerations
High-interest rates are a short term loan fact. Bridging loans can be expensive and the risk to the lender and yourself can be high. If the lender is not registered with the FSCA, the risk is amplified. There are many scammers out there, much like those in the unclaimed benefits arena so be very careful who you lend money from and read what you sign. Only use registered, reputable lenders to avoid fraud.
Pension payout delays
If there’s a delay, you might owe more in interest or incur fees. Stay on top of your payout application by establishing a contact at the pension fund administrators office who is dealing with your claim. Make regular follow-up calls to ensure the process runs smoothly. In some cases additional documents may be necessary.
Reasons bridging loans are so expensive
Bridging finance loans, especially those provided while waiting for a pension fund payout, tend to have high interest rates because of several key reasons:
Short-Term, High-Risk Lending
Bridging loans are meant to be short-term, often lasting only a few weeks or months. Lenders charge higher interest rates to compensate for the short duration, as they cannot earn long-term interest like traditional loans.
Uncertainty & Delays in Pension Payouts
Even if a pension payout is approved, delays are common due to administrative processes which is why it is so important to stay in contact with the fund administrators. This creates uncertainty for lenders, increasing the risk that the repayment might take longer than expected. The longer it takes, the more the lender is exposed to financial risk.
Lack of security
Unlike home loans or car loans that are secured against an asset, pension bridging loans are unsecured, meaning there is no physical collateral. If the pension payout is delayed indefinitely or does not come through as expected, the lender has limited recourse to recover the money.
Niche market
Bridging loans are offered by specialized finance companies, not mainstream banks. The limited number of lenders means there’s less competition, allowing them to charge higher fees and interest rates.
Urgency by borrowers
Many people seeking bridging loans need money urgently for things like medical bills, debt repayments, or living expenses. Lenders take advantage of this urgency, offering fast approval but at a higher cost. remember this is not a bank but a short term lender whose business it is to lend as little as possible for the highest possible return.
Admin cost and legal costs
Processing a bridging loan involves legal and administrative work, such as verifying the pension payout status and structuring the repayment agreement. These costs are often passed on to the borrower through high fees and interest rates.
What interest rates will I be charged for a bridging loan
Interest rates can range from 3% to 10% per month, depending on the lender and the perceived risk. It is important to provide proof of where in the process your payout is and proof that you are in a sound financial position who may just need some emergency money. Your credit score will count here.
Some lenders also charge admin fees, initiation fees, or early settlement fees, further increasing the cost. Again, read the documents you are signing, understand what they mean and if you are unsure, ask the question, in an email or message that can be used if necessary.