Divorce can be emotionally and financially traumatic, potentially generating debt as you and your spouse split income and assets.
Taking out a loan to tackle some of that debt might seem like adding gasoline to the fire, especially if your income will be dramatically slashed once the divorce is final.
But depending on your circumstances, taking out a divorce loan could be a good option for the next stage of your financial life. Here’s a look at how a divorce loan can help or hurt your post-divorce finances.
What Is a Divorce Loan?
A divorce loan is a personal loan used for divorce-related expenses.
Personal loans are unsecured loans that allow you to borrow a specific amount of money and pay it back, usually in monthly installments.
Interest rates for personal loans are usually lower than rates for credit cards but higher than rates for secured loans, such as home or car loans. A secured loan is a loan backed by assets you own, which can be used to pay the lender if you don’t repay the loan.
[Read: Best Personal Loans.]
Do You Need a Divorce Loan?
Whether you need a divorce loan will depend on the cost of your divorce and your financial resources.
Divorce expenses vary. If the divorce is amicable and legal costs are low, you might not need a loan. But if you go to trial, prepare for sticker shock from depositions, experts, preliminary hearings, the trial itself, as well as possible appeals.
An uncontested divorce could cost a few thousand dollars, a contested one could run at least $10,000, and a divorce that goes to trial might top $20,000, according to Martindale-Nolo Research’s 2019 divorce survey.
And divorce complicates finances. Both spouses need to review budgets for both day-to-day and unplanned expenses if they are limited in what they can withdraw from joint accounts.
The court might assist by mandating payments from one spouse to the other or by allowing both spouses to tap joint accounts. Meanwhile, a divorce loan can bridge the gap between when you need money and when you can actually access it.
Can You Get a Divorce Loan?
Your ability to get a loan could be made difficult by divorce proceedings, especially if you’re not sure about your ability to pay back the loan after the divorce is final. If you can, wait until you have a clear picture of your income, assets and expenses.
Financial counseling can help you triage your debts and expenses. If you have a lot of debt, a divorce-related loan might not be a good idea.
“You need to consider your ability to repay as well, if you’re going to take on a new loan,” says Rod Griffin, senior director of public education and advocacy for credit reporting bureau Experian. “Divorce can make it difficult to know. You’re trying to set up a new, independent life and figure out what housing, transportation and utility costs are going to be. Then you have to pay off this divorce cost as well, which adds to your financial burden.”
[Read: Best Debt Consolidation Loans.]
Is a Divorce Loan a Good Idea?
Your credit history and debt can help you determine whether a divorce loan is a good idea.
A divorce loan can help you consolidate and pay off debt and build your credit rating if you lose valuable credit history when your name is removed from joint accounts. If you didn’t build your own credit history during your marriage, you will likely struggle to qualify for car or home loans at favorable interest rates after your divorce.
Getting a personal loan and making all of your payments on time is an ideal way to build credit.
“It’s beneficial in that sense,” Griffin says. “It can help you establish and build credit history that will work for you in time.”
Still, divorce loans aren’t for everyone. A loan is a common form of debt, and a loan with a high interest rate can complicate what may already be a tenuous financial situation.
Making a monthly personal loan payment may be unrealistic if you are also trying to find a new place to live, manage on one income and pay divorce costs.
“Taking on debt, if possible, should be the last resort,” Griffin says. “You likely already have joint debts and are responsible for repayment of some of those as well. Taking on additional debt on potentially reduced income and reduced assets can make it even more difficult.”
Whatever you do, avoid predatory loans, which are short-term loans with sky-high interest rates. The interest charges can add up quickly if you can’t pay off your loan right away.
[Read: Best Home Equity Loans.]
How Do You Finance a Divorce?
Here are a few other ways to deal with divorce-related debt:
— Negotiate legal payments. Ask your lawyer if you can pay off your bill over a period of months or even years. “That could be a way to mitigate these costs and avoid some of the higher-interest options, like credit cards or personal loans,” says Chris Browning, host of “Popcorn Finance,” a personal finance podcast.
— Tap your home equity. If you came out of the divorce with sole ownership of your home and qualify for a home equity line of credit or loan, you could get a better rate than on a personal loan.
— Borrow from friends or family members. You might consider this option if you’re confident that you can pay back the money as agreed. Otherwise, you can damage — or even end — another relationship.
— Borrow from retirement funds. This is not an ideal option, but it might enable you to get money right away. You could make a withdrawal from an individual retirement account or a 401(k), or take a 401(k) loan. Browning says he doesn’t like this option because, “Typically when people move money from a retirement plan, they don’t move it back.”
After the divorce, a new financial reality will follow for each spouse.
Taking stock of income, assets and expenses, as well as setting up a budget, will be crucial for securing a strong financial future.
“It’s important to remain responsible with your finances and living within your new budget after such a major change,” says Jeffrey Arevalo, financial wellness expert at GreenPath Financial Wellness, a national nonprofit credit counseling agency in Farmington Hills, Michigan.
“Divorce can be an opportunity for a fresh start, and ideally you want to put yourself in the best position to succeed,” he adds. “Set goals, stick to the plan, and you can regain your financial health perhaps quicker than you thought.”
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