Personal Loan Mistakes to Avoid During Divorce
Divorce is expensive, and some people need to take out loans to help them get through the legal process. If you're going through a divorce, it's important to avoid making mistakes with your personal loans. Keep reading to avoid predatory loan practices and loans that can negatively impact your credit score and financial future.
What is a divorce loan?
A divorce loan is a type of personal loan that covers the cost of a divorce. Divorce loans are typically unsecured, meaning they don't require collateral, such as a house or car. This makes them easier to qualify for than other types of loans, but it also means they come with higher interest rates.
A divorce loan can be used for a variety of divorce expenses including attorney's fees, spousal support, and child support. It can also cover the cost of relocating or making other changes after the divorce has been finalized. They can also help you pay off joint debt with your former spouse.
Types of personal loans
Whether you want to consolidate debt, cover legal fees, or pay other expenses, there's a personal loan out there that can help. But with so many different personal loans available, it's tough to know which one would be best for you. Here's a breakdown of some of the most popular types of personal loans available to those going through a divorce.
Legal fee loans
If your divorce entails significant legal fees, a personal loan can help cover the costs. In fact, many lenders offer loans specifically for legal fees, so be sure to shop around for the best rates and terms.
A credit card can help you get cash quickly and easily, but credit cards come with high interest rates, which means you could end up paying far more than you borrowed over time. It's easy to get in over your head with credit card debt, so if you must use a card, opt for the lowest interest rate you can find. You may also be able to apply for a new credit card with a 0% introductory APR period.
A peer-to-peer loan is a personal loan funded by an investor rather than a bank. These loans often have lower interest rates than traditional personal loans as well as stricter eligibility requirements. If you’re interested in this type of loan, perform a quick online search to learn about peer-to-peer lending platforms.
If you have excellent credit and qualify for a low-interest rate, a divorce loan may be a good way to finance your divorce. However, if you have bad credit or can only qualify for a high-interest rate, a divorce loan may not be the best option.
Personal loan red flags
Before you sign on the dotted line, look for these red flags. The last thing you want is to be taken advantage of by a predatory lender.
Some lenders sneak in extra charges: loan origination fees, early repayment fees, or even the absence of a grace period. Read the fine print, and ask questions if anything is unclear. A good lender will be upfront about all fees associated with the loan.
High interest rates
Some lenders take advantage of people in a pinch by charging sky-high interest rates. Do your research, and make sure you understand the loan terms before you sign anything.
Required assets as collateral
Many lenders require assets as collateral for a divorce loan. If you default on the loan, they can take your assets to recoup their losses. Be careful about putting assets up as collateral, as you could lose them if you fail to make payments on the loan.
Pressure to sign the loan agreement right away
If a lender pressures you to sign the loan agreement right away, that’s a major red flag. A good lender will give you time to read the agreement and make sure you understand everything. A lender who rushes you into signing could be hiding something in the fine print.
Unreasonable repayment terms
How long will you have to pay back the loan? How much will the monthly payments be? Is there a penalty for early repayment? If the repayment terms seem unreasonable, that's a huge red flag. You don't want to end up in a situation where you can't afford the monthly payments or are penalized for paying off your loan early.
Some lenders require personal loans to be repaid within a few years, while others give borrowers several years to repay the loan. Make sure you understand the terms of the loan before you commit to anything.
Ways to pay for a divorce without taking out a loan
Going through a divorce is tough enough without having to worry about how you're going to pay for it. Of course, not every option mentioned here may be right for you, but you can use these ideas as a launching pad to figure out what works best.
Use your savings
If you have savings, this may be the time to use it. It can be difficult to stomach the idea of using your hard-earned cash to pay for a divorce, but it's often better than going into debt. Plus, once your divorce is finalized, you can begin replenishing your savings account and recovering your personal finances.
Sell some assets
Jewelry, furniture, or even a car – do you have any assets you could liquidate to help pay for a divorce? This may be an option, but make sure you don’t sell any marital items that have not been allocated solely to you. You also may need to refinance things like your mortgage if you keep the house.
Get a part-time job
If you don't have savings or assets to sell, another option may be getting a part-time job. The extra income could help you pay for things like attorney's fees, court costs, marital debt, a new home or vehicle, and types of debt like credit card balances or student loans.
Ask family or friends for help
If your situation permits it, consider borrowing from family or friends. While you may not savor this idea, some people find it better than going into debt.
Suggested reading: 10 Financial Mistakes to Avoid When Getting a Divorce
FAQ about divorce loans
Can I get a divorce loan with bad credit?
If you have bad credit, you may still be able to get a divorce loan by applying with a cosigner. A cosigner is someone who agrees to repay the loan if you default on it. This could be a friend, family member, or even your ex-spouse.
Another option if you have bad credit is to apply for a secured loan. A secured loan is backed by collateral, such as a house or car. Secured loans typically have lower interest rates than unsecured loans. On the downside, you could lose your collateral if you default on the loan.
Finally, you may be able to get an unsecured personal loan from a lender who specializes in lending to people with bad credit. These loans typically have higher interest rates than other types of loans, but they may be easier to qualify for if you have bad credit.
What if I need an alimony (spousal support) loan?
An alimony loan is a type of personal loan specifically designed for people who need financial assistance before they start receiving spousal support payments. Alimony loans can be used for a number of purposes, including covering living expenses, paying attorney's fees, or even just getting by. The key advantage of an alimony loan is that it can give you the financial stability you need during an uncertain time.
How can I save money on my divorce?
In some states, you can apply for and receive fee waivers or fee reductions. This can help you shoulder the court costs associated with divorce without taking out a loan. Your local legal aid service is another great resource where you might find low-cost or pro bono legal services.
Hello Divorce was created with affordability in mind. We believe divorce should not deplete a person financially. Before you apply for a loan, check out our plan options, which begin as low as $99. Note that our services can be purchased through a PayLater payment plan or paid in monthly installments through PayPal.