The Knot Guide to Personal Loans for Weddings
For many couples, planning a dream wedding is an exciting way to express their personal style and tastes and celebrate their love for each other in front of friends and family. Affording that wedding, on the other hand, is not always so easy. According to
The Knot 2015 Real Weddings Study of nearly 18,000 brides, the average cost of a wedding in the U.S. is at an all-time high of $32,641. This is despite the fact that the 2014 median household income was $53,657.
In many instances, cutting back on expenses is not possible. Spending two, three or five years working hard to save money can be equally daunting, especially if you are planning to start a family or are waiting until after your nuptials to move in together. In these cases, financing your wedding, engagement ring, or even your honeymoon through an unsecured personal loan, colloquially referred to as a wedding loan, may be a viable alternative. After all, your wedding is one of the most memorable and important days of your life. It should be special, which is why some people decide to use a personal loan or other financing method to create the wedding celebration they've always imagined. And there are trusted sources to help you do so: Prosper, and Upstart are two of the choices. But before you finance any element of your wedding, you should understand what it's actually going to cost you.
Personal Loan Basics
Before you start talking to lenders about obtaining a "wedding loan," it is important to understand that no such loan exists. What you are seeking is an unsecured personal loan, which can then be used to pay for your wedding expenses. When you go into a bank or speak to an online lender, make sure you understand these key terms:
- Unsecured Personal Loan: An unsecured loan is a loan given on faith. In other words, there is no real property or anything of value, such as a house or car, used to "secure" the loan for the lender. As such, personal loans are considered a larger risk and carry higher interest rates.
- Short-term Loan: Most personal loans used as wedding loans are short-term loans issued for a period of three to five years, sometimes less.
- Principal: This is the total amount of the original loan given to the borrower, which they must repay.
- Interest Rate or Contract Rate: The interest rate—sometimes called the contract rate—is the amount of money the borrower must pay the lender, in addition to the principal amount. Essentially, it is the fee charged by the lender that allows the borrower to use the money. This number is expressed as a percentage of the loan's principal amount.
- Amortization: This is the formal term for the organized repayment process of a loan. The amortization defines the repayment schedule and the agreed upon amount for each payment, including how much of that payment is dedicated to interest vs. principal for the entire term of the loan.
How Much Can You Borrow?
The actual amount of money you can expect to borrow when you take a personal loan for financing a wedding varies. According to personal finance website NerdWallet, personal loans are given in amounts that range from $1,000 to $50,000 or more. To secure a high level loan your credit score needs to be strong, typically above 760. However, traditional lenders are generally willing to work with anyone whose credit score falls into the low to mid 600s.
When it comes to personal loans, your credit score is the number one determining factor used by most institutions to determine whether you are a good candidate for a loan, as well as how much money you receive and at what interest rate. Credit scores take into account past financial decisions, including how often you pay creditors on time, whether or not you have successfully paid off loans in the past and how much debt you currently have.
A Note on Loan Terms
It's important to consider the term of your loan and how that impacts how much you pay each month, as well as how much you pay over time. There is an inverse relationship between these two numbers—longer term loans result in a lower monthly payment, but if you only pay the minimum amount due each month, you end up paying more in the end because of accumulated interest.
To reduce the impact of loan terms, it is important to cultivate your credit score from a young age, making sure to pay all bills on time and limiting debt, which helps you to qualify for a lower interest rate. Once you receive financing for your wedding and the day has passed, it is important to continue to make payments on time to protect and improve a good credit score.
Qualifying for a Personal Loan
Because personal loans are unsecured, banks and other lenders are very cautious when it comes to issuing them. These institutions thoroughly review a borrower's past credit history and current financial situation of all parties named on the loan. Some banks are more conservative than others and may be less comfortable issuing personal loans. As a result, they may ask you a number of questions about what this money will be used for and why you need it.
In addition, the bank looks at your credit report and asks for proof of income and other assets, such as a house, insurance policies, retirement accounts and more. Basically, they need to ensure that you are a responsible borrower and that you have resources that allow you to repay the loan.
Calculating Interest Rates
Most borrowers have a basic understanding of what interest rates are (fees to use the money borrowed) and that a low interest rate is best. However, the more complex aspects of interest rates can be difficult to grasp, which can turn a loan into a bad financial situation.
Borrowing $10,000 at a 10 percent interest rate is not as straightforward as owing $11,000 at the end of the term of the loan. This is because interest rates are generally expressed on an annual basis, meaning that you pay a 10 percent rate for every year you spend repaying the loan. Interest may be calculated as a flat fee multiplied by the lifetime of the loan, or you may be required to pay interest on both the principal amount and the interest from the past year, month or other period, otherwise known as compound interest.
Understanding this difference can cost you hundreds or even thousands of dollars, depending on the amount of your loan. Here's a basic example using a $10,000, 3 year personal loan with a 10 percent interest rate:
- Simple annual interest structure, pay $13,000
- Yearly compound interest rate, pay $13,310.
- Monthly compound interest rate, pay $13,481.82
Remember to Budget
Taking out a loan, especially for such an important day, should not be taken lightly. Before you sign on the dotted line, make sure you understand the impact that this loan payment has on your life and your finances. Draw up a budget that considers all of the expenses you and your partner are expecting to incur after the wedding, and make sure that your loan payment fits into it.
If necessary, use this loan as an opportunity to evaluate your personal financial picture as a couple, including monthly income, debt payments and spending habits. You may have to make some changes in order to ensure that your new loan gets paid on time.
Financing Your Reception
From the deposit needed to secure the wedding venue to adding your favorite off-season flowers, using loan money to finance a wedding reception can make the planning process easier and more enjoyable.
Before you obtain a loan for your wedding, take the time to write down all of the reception expenses you hope to cover with it. Next, map out a schedule that ensures each vendor gets paid on time to avoid late fees or other issues, such as losing a deposit or a reservation with your favorite photographer.
Financing Engagement Rings
Like the wedding itself, the average cost of engagement rings is on the rise. The Knot 2015 Real Wedding survey found that the average couple pays $5,871 for the engagement ring alone. In order to bear the burden of this expense, many couples opt for engagement ring financing, which generally comes in one of two forms.
Many national and well-known jewelry stores offer their own financing programs in the form of credit cards. Qualified buyers can apply in-store or online for a credit card that can be used to pay for an engagement ring. Most of these cards offer enticing offers, such as zero percent interest for the first 6 to 12 months or no money down. Additional promotions include low interest rates for a period of 18, 24, 36 or even 48 months. These plans vary from store to store and are based on how much you spend—longer terms are usually limited to purchases above a certain dollar amount, generally $5,000.
It's important to keep in mind that many of these promotional rates require on-time, equal payments and may require a down payment of up to 20 percent. If you miss a payment, the promotion is often no longer valid and higher interest ;rates may apply.
Getting A Personal Loan
To keep things simple, many couples opt to use their personal loan to finance an engagement ring along with other aspects of the wedding day. This makes payments simple to track and reduces the likelihood of a missed or late payment, which helps to preserve your credit standing.
Obtaining one loan vs. multiple lines of credit means fewer checks to your credit report. This protects your credit score from being run too many times, which may help when it comes to determining the interest rate you are required to pay on the loan.
Can I Still Get a Loan with Bad Credit?
While it only takes a short amount of time to harm your credit, building it back up again can take years. Fortunately, personal loans for people with bad credit do exist, although the rules that apply vary.
What is “Bad Credit?"
To most lenders, "bad credit" is any score below 600. However, people with "poor" (600 to 649) and "fair" (650 to 699) credit scores may also find securing a personal loan difficult. If you want an unsecured personal loan, banks typically look for a credit score above 700. Other vendors, including lending platforms such as Prosper, offer bad credit loan options. Regardless of where you obtain a personal loan from, lower credit scores always equal higher interest rates.
How to Increase Your Credit Score
To increase your credit score before you apply for a loan, there are a few important steps to take. First, check your credit report for accuracy. Make sure that all accounts, missed payments and payment history is accurate, and dispute any that are not. Disputes can take up to three months to resolve, so plan ahead and make sure you have enough time between checking your credit, applying for the loan and paying for the wedding.
You can increase your credit score through responsible financial management, including paying down or consolidating existing debt, settling collections and staying on top of your bills. If you have a history of late or missed payments, staying on track for six months or more goes a long way toward showing lenders that you are working to improve your financial habits.
If you are having a difficult time qualifying for a personal loan on your own, you may want to consider asking someone else who has a strong credit score to cosign with you. As long as you pay your loan back responsibly, this option brings minimal risk to the co-signer. If you don't make your payments then a co-signer is responsible for them, which negatively impacts their credit as well as yours. Be sure to conduct research and carefully discuss a repayment plan with your co-signer to ensure that everyone involved in the transaction is a comfortable with the deal.
Prioritize What's Important to You
The best way to manage your wedding costs and minimize any negative impact of a loan on your long-term financial health is to prioritize. Use the "rule of three" to decide which wedding expenses get the benefit of your loan. These three wedding expenses are typically non-negotiable and are the most important to you, such as the wedding dress, reception venue and wedding bands. These are the first—and possibly only—elements you use the loan for.
Next, list three things that aren't as important to you, such as flowers, a DJ and invitations. To counteract the effect of the loan, find a way to cut costs and pay outright for these three elements of the wedding day, which helps to minimize the amount of money you need to borrow.
Ways to Save On Wedding Costs
To follow through on the "rule of three" and cut costs in areas that are less important to you, consider some alternative ways to finance your wedding and save.
DIY Wedding Elements
One way to keep wedding costs down is to consider personal touches you can make yourself. From wedding programs to welcome baskets or escort cards, you can have a beautiful wedding while also keeping costs in mind. Check out some of our favorite DIY wedding ideas.
A major cost in almost every wedding is food. Fortunately, there are so many ways to include some of your favorite foods without going over budget. Consider these ideas to reduce your catering budget:
- Serve hors d'oeuvres and dessert only, rather than a full meal
- Reduce the number of courses
- Limit the number of guests
- Opt for a buffet
- Focus on comfort food that may be less expensive
- Select a simple two-tier cake for presentation, and serve sheet cakes to guests
- Offer beer, wine and a signature cocktail instead of a full bar
Off-peak Season Wedding
What time of year you choose to be married directly affects the cost of almost everything wedding-related, from the venue to the waitstaff and the flower arrangements. Having your wedding during the "off season," or on a Friday or Sunday is a simple compromise that saves a lot.
Want more info? Check out the dates you need to avoid from 2016 to 2018 to help save money on your wedding day.
Lesser-known financing option are wedding grants, which are typically reserved for couples in need or in extenuating circumstances. Many of these programs operate in a similar manner to the scholarships and grants you apply for to attend college. In addition, you can sometimes apply for grants that provide a free service or two, rather than finance the entire wedding.
Wedding grants generally require a formal application, which may include preparing elements such as videos, essays and photos. To learn more, perform a local search or check out wedding expos in your area, which may have a variety of giveaways or grants available.
Know the Facts Before You Secure A Wedding Loan
Paying for your wedding is no small task. Whether you plan to host a large event for over 300 people or an intimate ceremony for 50, it's easy for costs to add up quickly. Fortunately, personal financing is available to help make your wedding day a beautiful and joyful experience for you, your partner and your guests. Before you make a final decision, make sure to explore the variety of ways available to finance a wedding — including secured loans such as home equity lines of credit (HELOCs), credit cards and family loans. Regardless of the decision you make, thoroughly researching the risks and benefits makes paying for your wedding not only possible, but less stressful in the long run.
Disclosure: This post contains affiliate links, some of which may be sponsored by paying vendors.
XO Group Inc. and its affiliates do not provide tax, legal, financial, accounting or similar advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial, accounting or similar advice. You should consult your own advisers before engaging in any transaction.