How a personal loan for a divorce works
A personal loan is money you borrow from a lender and repay with interest. Personal loans are typically paid in equal monthly installments. These loans can be used for almost any purpose, including divorce. When we refer to a "divorce loan," we're talking about a personal loan that is used to pay for a divorce.
Pros and cons of personal loans
If you're considering a personal loan to pay for divorce, here are a few good points in their favor.
- You can borrow all the money you need to pay for the divorce -- possibly as much as $50,000 to $100,000
- Most personal loans are unsecured, meaning you don't have to risk anything of value as collateral.
There are some possible downsides to personal loans, too.
- You must pay interest on the loan, and if your credit score is low, your interest rate may be higher than expected.
- You'll have a new monthly payment to work into your household budget.
Getting a low-interest divorce loan
Ideally, if you decide to take out a personal loan to pay for your divorce, you'll score the lowest possible interest rate. Getting a low rate depends on factors like these.
Your credit score
Borrowers with higher credit scores typically qualify for loans at better rates. If your score is lower than you would like, you may consider borrowing the money from a lender that allows cosigners and asking someone you're close to to cosign the loan. When you bring on a cosigner, the lender considers their creditworthiness, and if that person has a high credit score, you benefit by paying a lower interest rate on the loan.
Employment and income
Lenders want to know that you're bringing in enough money each month to repay the loan. If you can't provide proof of employment and income, you are likely to have a tough time getting through loan approval. However, your employment history may give a lender enough confidence in your ability to repay that you're offered a lower rate.
Fixed or variable interest rate loan
With a fixed-rate loan, you can be sure of what your monthly payment will be because the interest rate never changes, you'll always have the same monthly payment and the same interest rate. Variable rates, on the other hand, can increase and decrease over time.
The personal loan interest rate on variable-rate loans usually starts lower than that of a fixed-rate loan, making a variable-rate loan look more attractive. However, if rates increase, you could find yourself with a loan you can't easily afford.
Secured or unsecured
If you take out a secured personal loan, you put an asset of value, such as your home or car, up as collateral. While most personal loans are unsecured, finding a lender that offers secured loans may be beneficial. Since the lender knows it can repossess the collateral if you miss payments, there's less risk and you're likely to land a lower interest rate.
Your repayment timeline
If you borrow money over a longer period of time, there's more risk to the lender and you may be required to pay a higher interest rate. Shorter-term loans sometimes come at a lower rate.
How to apply for a divorce loan
1. Decide how much you need to borrow
Generally, it's best to borrow the smallest amount possible when you get a loan. You'll pay interest on the amount you borrow. The more you borrow, the more interest you'll pay.
2. Check your credit score
Different lenders have different minimum required credit scores. Before going through the hassle of applying, check your score. The higher the score, the lower the interest rate you're likely to be offered. You can often check your credit score through your bank or a credit card in your name.
3. Determine if you need a cosigner
If your credit score is low, now is the time to decide whether you know someone who has a high score and would be willing to cosign the loan.
4. Shop around for a lender
To get a loan that works for you, compare multiple lenders. There are plenty of reputable online loans available, as well as loans from brick-and-mortar institutions. Shopping around is an important step, as each lender has its own lending criteria and each sets its own interest rates and fees.
5. Prequalify
Once you decide which lenders best fits your needs, go through the prequalification process with at least three of them. Most lenders will ask you to provide basic information, such as:
- Your name
- Address
- Place of employment
- How much you want to borrow
- And possibly, the amount of your rent or mortgage payment
6. Wait to hear if you prequalify
When a lender tells you that you've prequalified for a loan, it means the lender believes you're a good candidate and are likely to make it through the loan approval process. Once you've heard back from all lenders, compare their offers and decide which one you'd like to go with.
7. Fill out a full loan application
The only real difference between a full loan application and the application you fill out to prequalify for a loan is the amount of information you'll need to provide. For example, you'll be asked to provide proof of income and a list of monthly debts
8. Await final word and funding
Once your application makes its way through underwriting, the lender will let you know that it's been approved. At this point, all you need to do is read the loan contract carefully and ask for clarification if there's anything you don't understand. Finally, you'll sign the contract and wait for loan proceeds to hit your bank account.
