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

Disability loans can be useful tools to help bridge the financial gap between applying for government disability benefits and getting approval — which in some cases, can take months. However, disability loans have some potential risks, and these loans are not right for everyone.

If you are considering applying for a disability loan, you should be aware of what they are, who is eligible and whether or not they are advantageous for your financial situation.

How disability loans work

A disability loan is a personal loan you can use for necessary, everyday expenses like groceries, bills or mortgage payments if your disability has rendered you unable 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 shouldn’t be used as a replacement for disability benefits.

Types of disability loans

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

• Unsecured personal loan: A personal loan that doesn’t require collateral. Since collateral is not required, your approval and borrowing limit are greatly 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, house, 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, so this type of loan is easier to qualify for and the borrowing limit tends to be high.
• Payday loans: A short-term loan repaid on the borrower’s next payday or when their monthly SSA benefits are received. The borrowing limit varies, but the common payday loan amount is $500. Depending on the lender, you may be able to renew or extend the loan if you are unable to repay it by the due date. However, since these loans come with annual percentage rates as high as 400%, only use them as a final resort.

Who qualifies for a disability loan?

Because a disability loan is a personal loan, approval will be based on the lender and your financial history. The eligibility requirements will vary from lender to lender. If you don’t meet the requirements, most lenders will allow you to apply with a co-signer to increase approval odds. Your interest rate will also be determined by your credit history, so the better the score, the lower the interest rate.

Disability loans aren’t processed through the SSA like disability benefits are. Instead, disability loans go through a private lender. Therefore, they should only be taken out as a last-resort option 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’ve already applied for disability through the SSA, as the loans are a short-term fix, not a long-term solution.

How does the government determine who qualifies for disability?

After completing the online application, the SSA determines who qualifies for disability benefits by using a process that takes five months to complete and involves the five following questions:

1. Are you working? If you’re currently working in 2024 and your monthly earnings average is more than $1,550 or $2,590 for applicants who are blind, you likely won’t qualify as disabled.
2. Is your condition considered “severe”? Your condition must be severe enough to limit your ability to work and perform basic physical work-related tasks for at least 12 months to qualify.
3. Is it found on the list of disabling conditions? The SSA has a list of medical conditions that are considered eligible for disability benefits. If your condition is not listed, it is up to the SSA to decide whether it is severe enough to qualify.
4. Can you still do the work that you used to? You’re not considered eligible if you can still complete your work with your medical impairment(s).
5. Do you have the ability to do any other type of work? If you’re rendered unable to work, the SSA will consider factors such as your age, condition, education and past work experience to determine whether you have the ability to work another job. If not, you may be eligible for benefits, but you may be denied if there’s other work you could successfully perform.

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 typically done completely online and can be the fastest and easiest way to receive the cash you need. However, if you’re a credit union member or have used a certain bank before, you may want to see if that financial institution offers discounted fees 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 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. Prequalifying for a loan doesn’t guarantee the lender will approve your loan application.

Pros and cons of disability loans

While any kind of emergency loan can be a useful way to get the cash you need when you need it quickly, there are still drawbacks to be aware of before applying.

Pros

• Convenience: With some lenders, you can get approved within 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 works for you.
• Quick relief: If you’re unable to work and are waiting for your application to be processed, disability loans fill that gap.

Cons

• Potentially high interest rates: Depending on your credit, you could get stuck with a high rate, potentially leading to high-interest debt.
• Payday risk: Many payday-type loans are marketed towards those with disabilities, but they typically come with astronomically high interest rates that can keep you in debt for years.
• Short repayment terms: Depending on the lender, you may be given a shorter repayment period, meaning you could 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 are unable to repay your loan, you risk losing that asset to the lender.

Alternatives to a disability loan

If you don’t meet the eligibility requirements or don’t want to take out a long-term loan, you have alternatives to help cover expenses while waiting for your disability application to process 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.
• Cash advances: Cash advances are a form of credit card debt, and the money you borrow will need to be repaid. Keep in mind the interest rate for cash advances is much higher than your regular credit card APR, so this can be an expensive option. A cash advance is a short-term loan that allows you to use your credit card to borrow the cash you need. This 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.

Emergency advance payments

Before applying for a disability loan, see if you qualify for emergency advance payment. The SSA offers advanced disability payments to qualified individuals based on the severity of their condition, the type and how likely they are to get approved for disability benefits.

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 overpayment and don’t have interest rates.

You will need to prove you are currently in an emergency situation to qualify, and the payments will be paid back by subtracting the amount of emergency advance you received from the amount you’re set to receive in disability.

If you can’t qualify for emergency advance placement, you may want to look at disability loans.

The bottom line

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