Factoring Inflation into Your Retirement Plan

Right now, inflation is top of mind for everyone, perhaps especially retirees.

Inflation is important. But it is only one of the risks that retirees have to plan for and manage. And like the other risks you have to manage, you can build an income plan so that rising costs (both actual and feared) do not ruin your retirement.

Inflation and Your Budget

Remember that in retirement your budget is different than when you were working, so you will be impacted in different ways. And, of course, when you were working your salary and bonuses might have gone up with inflation, which helped offset long-term cost increases.

Much of your pre-retirement budget was spent on housing — an average of 30% to 40%. Retirees with smaller or paid-off mortgages will have lower housing costs even as their children are busy taking out loans to buy houses, and even home equity loans to pay for home improvements.

On the other hand, while health care looms as a big cost for everyone, for retirees these expenses can increase faster than income. John Wasik recently wrote an article for The New York Times that cited a recent study showing increases in Medicare Part B premiums alone will eat up a large part of the recent 5.9% cost of living increase in Social Security benefits. As Wasik wrote, “It’s difficult to keep up with the real cost of health care in retirement unless you plan ahead.”

Inflation and Your Sources of Income

To protect yourself in retirement means (A) creating an income plan that anticipates inflation over many years and (B) allowing yourself to adjust for inflation spikes that may affect your short-term budget.

First, when creating your income plan, it’s important to look at your sources of income to see how they respond directly or indirectly to inflation.

  1. Some income sources weather inflation quite well. Social Security benefits, once elected, increase with the CPI. And some retirees are fortunate enough to have a pension that provides some inflation protection.
  2. Dividends from stocks in high-dividend portfolios have grown over time at rates that compare favorably with long-term inflation.
  3. Interest payments from fixed-income securities, when invested long-term, have a fixed rate of return. But there are also TIPS bonds issued by the government that come with inflation protection.
  4. Annuity payments from lifetime income annuities are generally fixed, which makes them vulnerable to inflation. Although there are annuities available that allow for increasing payments to combat inflation.
  5. Withdrawals from a rollover IRA account are variable and must meet RMD requirements, which do not track inflation.   The key in a plan for retirement income, however, is that withdrawals can make up any inflation deficit. In Go2Income planning, the IRA is invested in a balanced portfolio of growth stocks and fixed income securities. While the returns will fluctuate, the long-term objective is to have a return that exceeds inflation.
  6. Drawdowns from the equity in your house, which can be generated through various types of equity extraction vehicles, can be set by you either as level or increasing amounts. Use of these resources should be limited as a percentage of equity in the residence.

The challenge is that with these multiple sources of income, how do you create a plan that protects you against the inflation risk — as well as other retirement risks?

Key Risks That a Retirement Income Plan Should Address

A good plan for income in retirement considers the many risks we face as we age. Those include:

  1. Longevity risk. To help reduce the risk of outliving your savings, Social Security, pension income and annuity payments provide guaranteed income for life and become the foundation of your plan. As one example, you should be smart about your decision on when and how to claim your Social Security benefit in order to maximize it.
  2. Market risk. While occasional “corrections” in financial markets grab headlines and are cause for concern, you can manage your income plan by reducing your income’s dependence on these returns.  By having a large percentage of your income safe and less dependent on current market returns, and by replanning periodically, you are pushing a significant part of the market risk (and reward) to your legacy. In other words, the kids may receive a legacy that reflects in part a down market, which can recover during their lifetimes.
  3. Inflation risk. While a portion of every retiree’s income should be for their lifetime and less dependent on market returns, you need to build in an explicit margin for inflation risk on your total income. The easiest way to do that is to accept lower income at the start.  For example, under a Go2Income plan, our typical investor (a female, age 70 with $2 million of savings, of which 50% is in a rollover IRA) can plan on starting income of $114,000 per year under a 1% inflation assumption. It would be reduced to $103,000 under a 2% assumption.

So, what factors should you consider in making that critical assumption about how much inflation you need to account for in your plan?

Picking a Long-Term Assumed Inflation Rate  

Financial writers often talk about the magic of compound interest; in real numbers, it translates to $1,000 growing at 3% a year for 30 years to reach $2,428. Sounds good when you’re saving or investing. But what about when you’re spending? The purchase that today costs $1,000 could cost $2,428 in 30 years if inflation were 3% a year.

When you design your plan, what rate of inflation do you assume? Here are some possible options (Hint: One option is better than the others):

  • Assume the current inflation of 5.9% is going to continue forever.
  • Assume your investments will grow faster than inflation, whatever the level.
  • Assume a reasonable long-term rate for inflation, just like you do for your other assumptions.

We like the third choice, particularly when you consider the chart below. Despite the dramatically high rate of today’s inflation that affects every result in the chart, the long-term inflation rate over the past 30 years was 2.4%. For the past 10 years, it was even lower at 2.1%.

A Long-Term View Smooths Inflation Spikes

A table shows what a $1,000 item would cost today if purchased in years ranging from 2020 to 1991, showing inflation rates of 6.9% currently, down to 2.4% for 30 years.A table shows what a $1,000 item would cost today if purchased in years ranging from 2020 to 1991, showing inflation rates of 6.9% currently, down to 2.4% for 30 years.

Managing Inflation in Real Time

Whether you build your plan around 2.0%, 2.5% or even 3.0%, it is helpful to realize that any short-term inflation rate will not match your plan assumption. My view is that you can adjust to this short-term inflation in multiple ways.

  • Where possible, defer purchases that are affected by temporary price hikes.
  • Where you can’t defer purchases, use your liquid savings accounts to purchase the items, and avoid drawing down from your retirement savings.
  • If you believe price hikes will continue, revise your inflation assumption and create a new plan. Of course, monitor your plan on a regular basis.

Inflation as Part of the Planning Process

Go2Income planning attempts to simplify the planning for inflation and all retirement risks:

  1. Set a long-term assumption as to the inflation level that you’re comfortable with.
  2. Create a plan that lasts a lifetime by integrating annuity payments.
  3. Generate dividend and interest yields from your personal savings, and avoid capital withdrawals.
  4. Use rollover IRA withdrawals from a balanced portfolio to meet your inflation-protected income goal.
  5. Manage your plan in real time and make adjustments to your plan when necessary.

Inflation is a worry for everyone, whether you are retired or about to retire. Put together a plan at Go2Income  and then adjust it based on your expectations and investments. We will help you create the best approach to inflation and all retirement risks you may face.

President, Golden Retirement Advisors Inc.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.

Source: kiplinger.com

How to Compare Mortgage Refinance Offers

@media (max-width: 1200px) body .novashare-buttons.novashare-inline .novashare-button-icon width: 100%; .novashare-inline .novashare-button .novashare-button-block background: #000000; .novashare-inline .novashare-button .novashare-border border-color: #000000; .novashare-inline .novashare-button .novashare-inverse color: #000000;


Dig Deeper

Additional Resources

If you own a home, you probably see a lot of advertisements or get mail about refinancing your mortgage. Refinancing your home loan can help you save money, lower your interest rate, or convert an adjustable-rate mortgage to a fixed-rate mortgage.

To get the best deal on your refinance, you need to compare offers from multiple lenders. Read on to learn how to evaluate these offers and select the option that best fits your needs.

How to Compare Mortgage Refinance Offers

When you apply for any type of loan, whether it’s a mortgage, car loan, or personal loan, you should take the time to comparison-shop. If you look at multiple loan offers, you’ll usually find a better deal.

1. Check Your Credit Score

The first thing to do when you’re thinking about refinancing your loan is check your credit score. Credit scores are one of the first things that a lender will look at when a borrower submits a loan application.

The better your credit score, the better your odds of getting approved for a loan. A good credit score also gives you more loan options to choose from and may help you secure a lower interest rate on the loan you eventually chose. And that’s likely to save you some money in the long run.

If you have a poor credit score, the loans you qualify for might involve higher upfront fees and a higher interest rate than your existing loan. That could defeat the purpose of refinancing. 

It’s easy to check your credit report for free. If you find errors on your report, work with the reporting credit bureau to remove them. And if you find your credit isn’t as strong as you thought, table the idea of refinancing for the time being and work on boosting your FICO score.

2. Consider Your Goals for Refinancing

Before you apply for a new mortgage loan, think about your goals for refinancing. Your reason for refinancing will make a huge difference in the loan you choose. 

For example, if you want to lower your monthly payment, you wouldn’t want to refinance to a loan with a shorter term. If you want a lower mortgage interest rate, you wouldn’t choose a loan with a higher rate.

Let’s take a look at some of the most common reasons you might want to refinance your mortgage.

Lower Monthly Payments

Refinancing your mortgage can help you reduce your monthly payment, giving you more flexibility in your budget. Extending the term of the loan or reducing its interest rate are two ways to do this.

Lower Interest Rate

If rates have decreased or your credit has improved since you got your current loan, refinancing your mortgage can help you reduce your interest rate, which will save you money in the long run.

Remove PMI

If your down payment for your current mortgage was less than 20%, you likely have to pay for private mortgage insurance (PMI). If your current loan-to-value ratio has risen above 20% due to your loan payments or increasing home values, refinancing can help you get out of paying PMI.

Cash Out Home Equity

If you’ve built a lot of equity in your home and want to use it for something else, like home improvement or investing, use a cash-out refinance to turn your home equity into money you can spend.

Adjust the Loan Term

Refinancing your mortgage lets you reset its term. You can extend the loan’s term or shorten it based on your financial goals.

Add or Remove a Co-Borrower

If you want to add a co-borrower or remove someone from a loan, the easiest way to do so is likely to refinance your loan. For example, you might refinance to remove an ex-spouse from your loan.

Convert an Adjustable Rate to a Fixed Rate or Vice Versa

Refinancing is an opportunity to switch from an adjustable rate to a fixed rate or vice versa, reversing the choice you made when you got your original mortgage. 

Switching from an adjustable-rate mortgage to a fixed-rate mortgage prevents a potential interest rate spike after the adjustable-rate loan’s rate lock period ends. Meanwhile, converting to an adjustable-rate mortgage could temporarily lower your rate — as long as you plan to sell during the rate lock period.

3. Compare Mortgage Lenders

Once you’ve made sure your credit is in good shape, take a look at a few different lenders. You can consider lenders in your local area like banks and credit unions as well as online lenders.

To find the best mortgage for your needs, look for a lender that is advertising the type of loan you want. 

Do you need an FHA loan? Make sure the lender offers that type of mortgage. If you have an expensive home, you’ll want to make sure the lender offers jumbo loans.

You can also do some preliminary comparison of the loan terms, such as the annual percentage rate the lenders are advertising for their loans.

4. Request Quotes From Multiple Lenders

Once you’ve settled on a few lenders that you’re interested in working with, ask each of those lenders for a quote.

As part of providing the quote, the lender will probably ask you for some basic information, such as the loan amount that you’ll need, your annual income, the amount of home equity you’ve built, and so on.

Based on the information you provide, each lender will give you a sample mortgage loan offer. This will include things like the interest rate, fees, and monthly payment for the new mortgage they are offering.

One of the best ways to do this is to use an online loan broker or quote website like LendingTree. These sites take your information and search for lenders that work with people like you. You can get a quick look at offers from multiple lenders this way.

If you only get a couple of quotes from these sites, you can then move on to approaching lenders on your own.

Keep in mind that these sites make money by referring you to lenders, so they’ll give your contact info to lenders. You’re likely to start getting calls and emails after requesting quotes, so be prepared for that.

5. Compare Loan Estimate Terms

After you get loan estimates from each lender, sit down and compare them to find the best deal and to make sure that the terms of the new loans beat the terms of your current mortgage.

The important things to look at include:

Interest Rate.

The interest rate of the loan determines how quickly interest accrues. The lower the rate, the lower your monthly payment and the overall cost of the loan because less total interest will accrue over the life of the loan.

Mortgage Points

Mortgage points are paid upfront when you close on the loan. Points are a type of prepaid interest and each point you pay usually reduces the rate of your mortgage by 0.25%. Paying points can save you money in the long run if you plan to stay in your home for a long time.

Fees

You’ll have to pay various fees as part of getting a new mortgage, including underwriting fees, home appraisal fees, application fees, and origination fees. The higher the fees charged, the more expensive it will be to refinance your loan.

Loan Term

The term of a mortgage is the amount of time it will take to repay the loan if you follow the minimum payment schedule. The most common terms are 15 years and 30 years. A 30-year mortgage will have a lower monthly mortgage payment while a 15-year loan will cost less overall. Which you choose depends on your refinancing goals.

Interest Rate Type

When you get a mortgage, you can choose from an adjustable-rate loan or a fixed-rate loan. Fixed-rate mortgages have steady interest rates which offer predictability over the life of the loan. Adjustable-rate mortgages usually have lower initial interest rates, but rates could rise in the future, increasing the cost of the loan and its monthly payment.

Closing Costs 

Closing costs are all of the costs you have to pay to get your new mortgage, including things like mortgage points and fees. You want to make sure that you can afford any closing costs your refinance lenders will charge.


Mortgage Refinancing FAQs

Mortgages and refinancing can be complicated. Make sure you understand the process and why you might want to refinance before starting the process.

Should I Refinance My Mortgage?

Whether you should refinance your mortgage depends on your personal financial situation and your goals for refinancing.

You shouldn’t refinance just for the sake of refinancing. In most cases, refinancing only makes sense if it saves you money over the life of the loan, lowers your monthly payment, or helps you get out of debt faster. You’ll have to run the numbers to see if any of these situations apply to you.

How Much Money Can I Save by Refinancing?

Depending on the interest rate of your old loan and whether you’re paying PMI, refinancing could save you a lot of money.

Imagine you have a mortgage with a $250,000 balance and fifteen years remaining in its term. The interest rate of that loan is 4%. Your monthly payment before taxes will be $1,849 and you can expect to pay $332,820 over the remaining life of the loan.

Refinancing to a 15-year loan at 3% interest will drop your monthly payment by more than $100 to $1,726. Over the life of your new loan, you’ll spend $310,680, saving you $22,140 overall. If the closing costs and other fees are less than that amount, refinancing means saving money and adding flexibility to your monthly budget.

Does Refinancing Remove Private Mortgage Insurance (PMI)?

If you’re able to eliminate PMI from your loan payment, you can save even more. According to a study from the Urban Institute, the average loan that includes PMI had a principal balance of $289,700 in 2020. The Urban Institute reports that PMI averages between 0.22% and 2.25% of your loan’s value. Even if you’re on the lower end of that range and paying 1%, refinancing to eliminate PMI can save you almost $2,900 per year on an average loan.

For conventional loans, you can remove PMI by refinancing to a loan with a loan-to-value ratio of 80% or less, meaning you have at least 20% equity in your home. That equity can come from paying down your original loan’s balance or due to appreciation in your home’s value.

Unfortunately, mortgage insurance is difficult to avoid on some types of mortgages, includinge Federal Housing Administration loans. Depending on when the loan originated, mortgage insurance can be permanent or fixed for 11 years regardless of the equity you build. 

The only way to get out of these payments when you refinance is to refinance to a conventional loan. If you refinance to another FHA loan, you still have to pay for mortgage insurance.

Can I Refinance if I’m Underwater on My Mortgage?

If you wind up underwater on your mortgage, meaning you owe more than your home is worth, it can make refinancing more difficult. Many lenders require that you have some equity in your home before refinancing.

However, there are some lenders that will let you refinance, especially if you can put some extra cash toward the loan balance to get out of being underwater. 

In the past, the federal government has offered special refinance programs for borrowers with government-secured loans, such as the Enhanced Relief Refinance Mortgage program and HARP. Programs like these could appear once more in the future, though that’s not guaranteed.

Can I Refinance if I Have a Second Mortgage?

Some people wind up having multiple mortgages at one time. This can happen if you get a home equity loan or home equity line of credit on top of your current mortgage.

Refinancing with a second mortgage is possible, but can be more difficult than refinancing when you only have one loan.

One common solution is to refinance both loans into a single loan when you refinance. This has the added benefit of leaving you with just one monthly payment to make. It’s also relatively simple to refinance just your second mortgage.

Refinancing your primary loan is more complex. You need to work with both the new lender and the lender who provided your second mortgage and have the second mortgage lender agree to remain subordinate to the new loan. That means that the lender for your refinance loan has first priority to recover its losses in the event that you stop making payments.

If your second mortgage lender won’t agree to this, you won’t be able to refinance just your primary loan alone.

Can I Refinance More Than Once?

Yes, it’s possible to refinance your mortgage more than once. You can refinance as often makes sense for you financially so long as you can find willing lenders.

In reality, you don’t want to refinance your mortgage often. Refinancing incurs major costs, and the process can reduce your credit score in the short term, potentially impacting your ability to qualify for other loans or credit lines.

What Information Do I Need to Provide to a Mortgage Broker?

One option if you’re looking to refinance is to work with a mortgage broker. Mortgage brokers are middlemen who look at your financial situation and try to match you with lenders that will best help you meet your financial goals. This saves you the effort of having to research dozens of lenders to find the best deals.

Your mortgage broker will need much of the same information you’d need to provide to a lender, including:

  • Proof of Income. Bring your two most recent pay stubs and information about any other income you have so the broker can confirm your annual income, which can affect your ability to qualify for loans. 
  • A List of Bank and Loan Accounts. This shows your broker and would-be lenders how much cash you have on hand and your current liabilities. Lenders want to know that you have enough in the bank to deal with upfront refinancing costs. They also need to know your debt-to-income ratio, a key measure of your ability to afford your loan.
  • Details About Your Home and Current Mortgage. Bring your most recent mortgage statement so the broker can see your remaining balance, interest rate, monthly payment, and other details. 
  • Your Goals for Refinancing. Make sure to explain why you’re refinancing, such as to lower your monthly payment or to convert an adjustable-rate loan to a fixed-rate loan. This helps guide the broker as they look for the best loan for you.

Final Word

There are many reasons to refinance your mortgage, but most involve saving money — either by lowering your monthly payment or reducing the total cost of the loan. Understanding why you’re refinancing and knowing how to effectively compare loan offers from mortgage refinance lenders increases the odds that you’ll choose the loan that’s the best choice for your personal financial situation.

.kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-table-of-content-wrappadding:30px 30px 30px 30px;background-color:#f9fafa;border-color:#cacaca;border-width:1px 1px 1px 1px;.kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-table-of-contents-titlefont-size:14px;line-height:18px;letter-spacing:0.06px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;text-transform:uppercase;.kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-table-of-content-wrap .kb-table-of-content-listcolor:#001c29;font-size:14px;line-height:21px;letter-spacing:0.01px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;.kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-table-of-content-wrap .kb-table-of-content-list .kb-table-of-contents__entry:hovercolor:#16928d;.kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-table-of-content-list limargin-bottom:7px;.kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-table-of-content-list li .kb-table-of-contents-list-submargin-top:7px;.kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_9bf7f1-5e .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:beforebackground-color:#f9fafa;

Stock Advisor

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee.

TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he’s not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.

Source: moneycrashers.com

Engagement Ring Financing Options

A ring can be a significant investment. And often it’s only the beginning of wedding expenses, as you consider a future as a couple. That’s why it can be a good idea to consider your options if engagement ring financing is in your future.

Some people may opt to save in advance and not need wedding ring financing, but if you’re not among them, you might be looking at how to finance an engagement ring. There are definitely options, but an important thought to keep in mind is staying within an affordable — for you — range and not comparing how much other people may feel comfortable spending on an engagement ring.

Why Not Pay for an Engagement Ring Upfront?

If you’ve just begun browsing engagement rings, you will likely see they come at a variety of price points. The best price for an engagement ring? One you can actually afford.

In the past, there’s been a rule of thumb that an engagement ring should cost the equivalent of three months’ salary. But that ‘rule of thumb’ is likely rooted in industry advertising from the 1930s and it doesn’t reflect the current reality.

In fact, Americans spend just a fraction of that amount on an engagement ring — $5,500 on average in 2020. Considering that the average monthly U.S. income is also about $5,500, abiding by the three-months rule would mean spending $16,500 on the ring. Increasingly, Millennials and Gen Zers are spending even less on engagement rings, preferring to spend no more than $2,500.

Can you finance an engagement ring? Yes, and there are several avenues available to you. But no matter what the average engagement ring cost is, it’s a good idea to buy a ring you can comfortably afford without financing. But even if you have cash ready to buy a ring, you may still consider financing options. People typically finance a ring because:

•   They want liquid cash available for upcoming wedding expenses.

•   They may not be able to pay cash for a ring without significantly dipping into their emergency savings, which could become problematic if an unexpected expense crops up.

•   They may want to spread the payment of an engagement ring across several pay cycles, or may be waiting for a large sum of cash to hit their account.

•   They may want to take advantage of purchase protection available on their credit card for a large purchase. However, purchase protection may not apply for a ring, as there are exclusions for certain categories of purchase, such as antiques or one-of-a-kind items.

•   They may want to take advantage of credit card points that come with a large purchase.

Recommended: Credit Card Rewards 101: Getting the Most Out of Your Credit Card

Engagement Ring Financing Options

There are multiple options for financing an engagement ring, and the best option for you may be as unique as the ring you choose for your partner.

These include:

•   Personal loans.

•   Credit card.

•   Buy now, pay later options.

•   Jeweler loan.

Here are some things to consider as you consider financing options for an engagement ring.

Financing an Engagement Ring with a Personal Loan

What is a personal loan? It’s a lump-sum loan that can be used to pay off other bills or to pay for an expense, like buying an engagement ring.

With a fixed interest rate and a payment end date, using a personal loan for wedding ring financing can be a good option if you have a budget for paying the ring off, or want to spread the payment through a longer period of time. That way, you can still have available emergency savings and not have to liquidate other assets.

But whether or not to get a personal loan is something that takes careful thought. You may be tempted to look at more expensive rings than you might have if you had been paying cash upfront. And that engagement ring loan includes paying interest in addition to the actual cost of the ring. It can also be a good idea to make sure that you can comfortably afford the loan payments and that it wouldn’t be an excessive burden if you were to lose income.

Financing an Engagement Ring With a Personal Loan: Pros and Cons

Pros Cons
A fixed-interest rate and payment terms means you’ll know exactly what you owe each month Interest adds to the overall cost of the ring
A personal loan can give you more flexibility in where your money goes, especially as wedding expenses loom A personal loan may add to your overall debt and may make it easier to overextend yourself financially
A personal loan can spread the purchase through several months, minimizing the all-at-once financial burden of the purchase A personal loan may make you consider rings that you otherwise couldn’t comfortably afford in your budget, leading to feeling financially overextended

Financing an Engagement Ring With a Credit Card

Using a credit card for an engagement ring purchase may make sense if you have the cash to pay your bill at the end of the month. It also may make sense if you have a credit card with 0% APR and are confident you can pay off the ring before the promotional period ends.

Some people also may want to use a credit card to earn points or to take advantage of purchase protection. But before you pull out your card, consider a few things:

•   Does your jeweler offer a discount for cash purchases? If so, then that discount may be worth considering cash options rather than paying with a credit card.

•   Does purchase protection cover a ring? It may be worth calling your credit card company, since your ring may fall under exclusionary categories.

Financing an Engagement Ring With a Credit Card: Pros and Cons

Pros Cons
Ability to earn points A high interest rate may minimize the value of those points; a variable interest rate may lead to you paying more for the ring overtime
Ability to spread your payment over time You may have more large purchases in your future, and having a ring on your card may limit your purchasing power
Ability to take advantage of 0% APR offers A large purchase on one card may increase your credit utilization ratio, which could affect your credit score

Financing an Engagement Ring With a Buy Now, Pay Later Loan

A buy now, pay later loan (BNPL) works like it sounds — a purchase is spread out over time. Unlike a personal loan, a BNPL loan (also called a point-of-sale loan) may be done through a merchant or through a virtual card. These may have no interest if you pay in a set amount of time, but the repayment period may be short and there may be fees involved.

Financing an Engagement Ring With a Buy Now, Pay Later Loan: Pros and Cons

Pros Cons
Purchase won’t affect your credit-utilization ratio There may be a purchase limit to a buy now, pay later loan, limiting your options
Possibly interest free Repayment periods may be relatively short. Plus, while there may not be interest, there may be fees affiliated with the loan
Ability to spread the purchase over several weeks or months No opportunity to earn rewards as you might be able to with a credit card

Financing an Engagement Ring With a Jeweler Loan

Some jewelers offer their own loan programs. These may have promotional periods where you can take advantage of a 0% interest rate, and may also come with additional perks, such as discounts for future purchases or a discount on future repairs. Jeweler loans also may have a fixed rate of interest.

But this interest rate may be higher than an interest rate you could get with a personal loan or on your credit card. You also may be required to put a down payment on the purchase.

Financing an Engagement Ring With a Jeweler Loan: Pros and Cons

Pros Cons
May have a 0% interest period Interest rate may be high after a possibly short introductory period
Discounts and perks with the jewelry store You may miss opportunities to earn points elsewhere, like on your credit card
Ability to spread the purchase over several weeks or months May still require a down payment

Tips for Buying an Engagement Ring

Consider the pros and cons of engagement ring finance options, and remember that after the engagement ring comes wedding expenses. It may be a good idea to talk through engagement ring options with your partner prior to a proposal, especially if you’re already sharing your finances. While it may not feel as spontaneous, talking through big purchases that mutually affect you may be good practice for combining your lives. Having these conversations can set the stage for your wedding and your lives together, including whether borrowing money for your wedding is the best option for your financial situation and goals.

Other tips for buying an engagement ring:

•   Ask your partner what they want. Also, talk to your family and their family: A relative may have heirloom jewelry they’d like to pass down.

•   Browse together. In addition to looking at jewelry stores, consider estate sales, antique stores, and browsing online to get a sense of styles and prices.

•   Negotiate. Some jewelers may offer a discount if you pay in cash.

•   Remember ring insurance. An engagement ring may not be covered under your homeowner’s policy without an added rider to the policy or may be covered only in specific circumstances. Research insurance policies before you buy the ring.

Looking for a Personal Loan? What to Consider

A personal loan can be an avenue that makes sense for wedding ring finance. Having a fixed interest rate and a finite loan term allows you to know exactly what you’re paying each month, and spreading the cost over time may mean the purchase fits within your monthly budget. Here are some things to consider when using a personal loan to buy an engagement ring:

•   What are the fees? Some loans may have fees, such as an origination fee (when you open the loan) or an early termination fee (if you pay off the loan early). Make sure you know any potential fees prior to applying for the loan.

•   Know your budget. Just because you can get approved for a certain size loan doesn’t mean that’s the best choice for you. Make sure you choose a loan size you’re comfortable with.

•   Know the loan terms. Some loans have hardship clauses that may help if you are at risk of falling behind on payments due to an unforeseen financial strain.

•   Shop around. Compare loan terms and interest rates for personal loan pricing. Comparing rates won’t affect your credit score. A hard credit check will only be done when you apply for the loan.

Recommended: Avoiding Loan Origination Fees

The Takeaway

With a big purchase like an engagement ring, there are several avenues for paying for the purchase. Considering the pros and cons of each option can help you decide on the best one for you. And remember: An engagement ring is only one expense in the future you are creating for you and your partner, so consider it the first of many financial steps in your future as a married couple.

If you’re looking for a personal loan with no fees and competitive interest rates, a SoFi Wedding Loan might be a good fit for you. An easy online application process is the first step to finding your rate.

Considering a personal loan for financing an engagement ring? Find your rate at SoFi.

Photo credit: iStock/Delmaine Donson


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SOPL1121029

Source: sofi.com