Should I Use a Personal Loan to Pay for My Divorce?
Christy Bieber, The Motley Fool
Updated
When you and your spouse part ways, you need to be prepared for the price tag that goes along with the dissolution of a marriage.
Wedding cake with angry married spouse figures on top of it.
Image source: Getty Images
Nolo estimates the average cost of divorce at around $15,000 -- and that’s just for the legal fees you must pay to formally end your union. After divorce, you may also have to give up some of your savings and property to your spouse and could end up ordered to pay alimony and child support.
While divorce is expensive, the costs of having good legal representation are worth paying. The divorce settlement you reach will impact your future financial security, the property you receive, and even the time you have with your children once your marriage is over. You can’t afford to skimp when it comes to hiring a good lawyer -- but you need to find a way to pay for the cost.
Many people who are going through a divorce aren’t sure where to start when it comes to securing financing for legal expenses. For a good number of those divorcing individuals, a personal loan can be the best approach to pay for the divorce.
Why is a personal loan a good option to pay for divorce?
Personal loans can be a good option to pay for divorce for many different reasons. Here are some of the benefits associated with using a personal loan to pay divorce costs:
You can borrow a big sum of money: Many personal loan lenders allow you to borrow as much as $50,000 or even up to $100,000. You may have more access to funds with a personal loan while your savings or the credit limit on a credit card would run out sooner.
You don’t generally need collateral: In most cases, you can find an unsecured personal loan, which means you don’t have to pledge any property as collateral. This can be beneficial in a divorce when your property may be shared marital property that’s tied up in litigation and thus can’t be pledged to guarantee a loan.
Personal loans often have lower interest rates than other sources of funds: The interest rate on credit cards is typically higher than the interest rate on personal loans, for example.
Personal loans have a fixed repayment schedule: You’ll know up front when your debt will be paid off so you don’t have the uncertainty of debt hanging over your head indefinitely.
Personal loans can be repaid over several years: It’s common for personal loans to have repayment terms of around three to five years, although some loans have shorter repayment timelines and others have longer timelines. This multi-year repayment schedule gives you plenty of time to pay back what you owe with reasonable monthly payments.
You have control over the funds: If you borrow money in your own name after you’ve separated, your spouse has no control over what you do with those funds -- whereas using assets in shared marital savings accounts can sometimes be difficult. With a personal loan, you get the money up front from the lender and can use it to do anything you’d like, from hiring a private investor to track down missing marital assets to paying legal fees.
Because of these benefits, using a personal loan can be preferable to many other alternative sources of funding a divorce.
Downsides of personal loans to fund your divorce
Of course, there are some downsides associated with using a personal loan to get a divorce.
You have to pay interest: While the interest rate is usually lower than the standard rate on a credit card, you still have to pay interest on your debt. And, depending on how much you borrow and how long it takes to pay back the loan, the interest costs could add up to several thousand dollars. This makes your divorce even more expensive.
Qualifying for a loan can sometimes be hard: Depending upon your income, credit score, and other debt obligations, it may be difficult for you to get a loan with a reasonable interest rate and good terms. This can be especially true if you were a stay-at-home spouse without income of your own or if you and your spouse have a lot of joint debt.
You’re stuck borrowing a fixed amount: When you take out a personal loan, you get a fixed amount of money that you receive all at once. You can’t just request a loan increase if it turns out your divorce is more expensive than anticipated -- you’d need to apply for an entirely new loan. And, since you get all the money up front but may pay legal fees over time, you may be paying interest on borrowed money you won’t need for months.
What are your alternatives?
As you consider the pros and cons of using a personal loan to pay for divorce, you also need to consider your alternatives. After all, if a personal loan is the only reasonable source of funds to pay for your divorce, taking a personal loan is clearly the right choice. But, if you have other options, you’ll need to compare those other solutions to getting a personal loan.
Some of your other options to fund your divorce include the following:
Using savings: This can be tricky if you and your spouse share access to savings. But, if you can access spare funds and pay your lawyer from available cash, you can avoid having to go through the loan application process or pay interest. The downside, though, is that this savings won’t be available to set up your new life after divorce.
Charging legal fees on a credit card: Not all lawyers allow you to charge your legal fees, but some do. If you charge your legal fees, you may have to pay a higher interest rate than you would with a personal loan -- and your credit limit may not be high enough to fully cover divorce costs. The upside is, you can borrow money as you need it and don’t have to take a big loan at once -- and could potentially request a credit line increase if it turns out you need more money. If you can get a card with a 0% promotional APR, you could potentially also avoid paying interest on the money you borrow for your divorce if you can pay back what you owe within the promotional period.
Borrowing from family: If you have family members willing to lend you money, you can also avoid applying for a loan and paying interest. Unfortunately, this could make your family relationships uncomfortable, especially if you can’t pay back the loan right away. And, your family members may feel like they get to weigh in on decisions made during your divorce if they lend you money.
As you can see, in many cases, a personal loan is a better choice than these other options -- but it will depend on your situation.
Be smart about borrowing for divorce
Whatever approach you choose, try to keep borrowing costs as low as possible by looking for ways to cut costs during divorce -- such as negotiating on some issues outside of court.
And, be sure to shop around for the most affordable financing possible because you don’t want to start your new single life with a bunch of costly debt hanging over your head.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
