Should you take out a disability loan while waiting for a benefit decision?

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In a Nutshell

If you’re unable to work due to a medical condition and you’re waiting for the government to decide whether you’re eligible for disability benefits, you may be considering a disability loan — which is essentially a personal loan. If you can get by without borrowing money, that’s probably best. If you can’t, you’ll want to consider your loan options carefully.
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A disability loan is something to consider if you’re no longer working, you’re waiting on a disability benefit decision from the government and you need help covering expenses in the meantime.

A disability loan — which is a personal loan — can get you cash to pay for your mortgage, household bills, groceries and other expenses.

But before you go that route, let’s take closer look at how disability benefits work and the pros and cons of disability loans. We’ll also review some possible alternatives that might help bridge your financial gap until you have income again. Finally, remember that although we use the term disability loan, what we’re referring to is a personal loan.

What is a disability?

According to the Social Security Administration, you may be considered disabled if you meet all of the following requirements.

  • You are unable to perform work you did previously
  • Your medical condition will not allow you to perform other types of work
  • Your disability has lasted or is expected to last for at least one year, or will lead to your death

The Social Security Administration, or SSA, uses a five-step process to determine whether you qualify for disability benefits.

  1. Employment status. In 2019, if you’re working and earn at least $1,220 a month before taxes, you generally cannot be considered eligible for disability benefits.
  2. Severity of condition. If the SSA doesn’t find that your condition significantly restricts you — for at least 12 months — from everyday activities like standing, walking, lifting, sitting and remembering, you will not qualify as disabled. If it’s found your condition is getting in the way of basic work-related activities, the SSA moves to Step 3.
  3. Listed conditions. In this step, the SSA checks if your condition is on the list of medical conditions. This list is extensive and detailed. If your condition is not listed, the SSA will decide whether it’s as severe as a listed medical condition. If so, the SSA can still consider you disabled. If not, the process goes to Step 4.
  4. Ability to perform your job. While your condition may not be listed or considered as severe as a listed condition, the SSA must determine whether your condition prevents you from doing the same work you did before. If it does, the SSA moves to Step 5.
  5. Ability to perform other work. The SSA then determines whether you can do another type of work. In evaluating this, the SSA looks at whether you have any skills, experience or education that you can apply to different jobs, despite your medical condition. If it appears you can do other work, the SSA will deny you disability benefits. If not, you may be considered disabled.

There are two main types of federal disability programs. Social Security Disability Insurance, or SSDI, covers you if you worked a certain amount of time and paid into Social Security. Supplemental Security Income, or SSI, provides payments based on financial need.

How to apply for disability

Disability benefits applications typically take three to five months to process, so it’s best to apply immediately after you become disabled. To apply, you can fill out an application online, over the phone or in person at a Social Security office near you. Documents and other info you’ll probably have to provide include:

  • Birth certificate
  • W-2s or self-employment tax returns for the previous year
  • Medical records and an Adult Disability Report, which is available for download on the SSA website, includes details about your work history and condition
  • Your most recent employer’s name and how much you earned
  • Date you were no longer able to work because of your condition
  • Whether you expect to receive a pension from the federal government
  • Whether you ever served in the military

What is a disability loan?

If you can’t work because of a disability and are waiting to hear whether you’re eligible for disability benefits, you might need some cash to tide you over. In this case, you may consider a disability loan, which is essentially a personal loan. Just be aware that some are cash-advance and payday-type loans that are marketed to people with disabilities and can come with costly interest rates.

The Social Security Administration may be able to help if you’re in an emergency situation. Based on the severity and type of the condition and the likelihood your claim will be approved, you may qualify for advanced payments for up to six months while you’re awaiting your final decision. These are called presumptive disability or blindness payments — which is a zero-interest advance of your payments — and do not need to be paid back even if you do not ultimately get approved for benefits unless there is an overpayment.

You may be eligible to get an emergency advance payment through the SSA if you’re already due to receive Supplemental Security Income payments but haven’t received them yet. But as part of the application, you must prove that you’re facing a threat to health or safety, such as insufficient money for food, clothing, shelter or medical care.

In addition, the maximum emergency advance payment an applicant can get is the smallest of the SSI Federal benefit rate (plus any federally administered State supplement), the total amount of benefits due, or the amount requested for the financial emergency. You may also be eligible for something called an “immediate payment,” which is subtracted from the first regular payment your due, but cannot be an amount higher than $999.

If you get an emergency advance payment, it will be paid back by subtracting the emergency advance payment amount from payments already due you and you’ll be paid the difference, or by subtracting the emergency advance payment from your current monthly benefits in six monthly installments if you’re not due past payments.

Pros and cons of disability loans

As with all financial products, there are advantages and downsides to disability loans.

Pros of disability loans

Disability loans that offer quick turnaround may help you get cash fast. In some cases, you can fill out a brief application and find out if you’re approved within minutes.

If you’re struggling financially or have a shaky credit history, a disability loan —which is a personal loan — may help until you get a benefits decision, so long as it comes with terms and costs you can manage and you’re confident you can repay it.

Cons of disability loans

There are a number of disadvantages to disability loans, starting with the terms that come with many disability loans.

If you no longer have a stable income and apply for a disability loan, certain lenders may reduce their risk by offering you short repayment terms. While you may receive the cash you need, you might have to pay it back far faster than you would if you took out a disability loan while you were working.

Lenders may offer personal loans with high interest rates to protect themselves when lending money to you while you’re unemployed — and they may charge expensive loan origination fees or other fees. Costly fees paired with high interest rates can make it easy to rack up debt in a hurry — a dangerous scenario when you’re not working.

Disability loan alternatives

Before you take out a disability loan, do your research and consider other options.

  • Disability insurance: If your employer offers short- or long-term disability insurance, you may want to enroll as a preventative measure in case you become disabled. Just keep in mind that you may not be able to get coverage for claims related to a pre-existing condition, so be sure to review the terms of the specific policy. You can purchase disability insurance privately as well.
  • Government assistance: Government-assistance programs like the Supplemental Nutrition Assistance Program, subsidized or public housing programs, presumptive disability and blindness payments, and Temporary Assistance for Needy Families may help cover your basic necessities.
  • Cash advances: A cash advance can allow you to receive cash by taking a loan against your credit card spending limit. But before you get a cash advance, consider all costs and fees associated with it and compare interest rates between your credit card cash advance rate and available disability loans because cash advances can sometimes come with high APRs.
  • Short-term loans from family members or friends: If somebody close to you is willing to help you out, you may be able to get a loan from a family member or friend that offers far more favorable terms than a disability loan from a lender.

Bottom line

It can be tough to cover your expenses when you’re out of work and waiting for the Social Security Administration to make a decision on your disability payments. While a disability loan might be a good idea, be sure to weigh the pros and cons and determine whether you’d be better off pursuing an alternative.

Calculate your Social Security benefit

Use our Social Security calculator to find your estimated monthly Social Security benefit for when you retire.

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.