Getting Married? Here's the Best Type of Personal Loan to Cover the Party

Avoid this type of loan for your wedding.

Getting married? Congratulations on your big day! You will be joining 2.5 million other couples this year. This is about 15% higher than the average year and a 30% jump from 2021. COVID-19 put a damper on many wedding plans and many couples have rescheduled their nuptials for this year. Unfortunately, the average cost of weddings have also gone up. 

The average wedding cost in 2019 was $24,700. For 2020, the number dropped to $20,286 due to COVID, but the number increased by over 33% for 2021, as the average wedding cost skyrocketed to $27,063. 

According to LendingTree, 45% of newlyweds went into debt for their weddings. If you are looking to take out a loan to cover your wedding, it is important to understand the pros and cons of the different options available. This can help you avoid starting your marriage out on the wrong foot.

Can I get a wedding loan?

While there is no such thing as a wedding loan, many couples take out personal loans to pay for their weddings. Before getting a personal loan, it is important to understand the different types of personal loans and find the right one for you. Personal loans fall into two categories: unsecured and secured loans. 

Secured loans are backed by collateral such as property, cars, and other assets. Unsecured loans do not require collateral. Couples taking out a wedding loan typically take out an unsecured personal loan. You can get a personal loan for your wedding if you qualify for it.

Unsecured personal loans

An unsecured personal loan is not secured by any collateral. As a result, unsecured loans are a higher risk for financial lenders. Lenders typically require a higher credit score to qualify for an unsecured loan. Common examples are credit cards, student loans, and payday loans. Here are more types of unsecured loans that can be used for a wedding:

1. Personal loans: A personal loan is money you borrow from a financial institution. You receive a one-time cash payment and have to pay back the loan in regular monthly payments.
2. Credit cards: A credit card is a line of credit you can use to make purchases. You will need to make at least the minimum payment every month.
3. Peer-to-peer lending: Peer-to-peer (P2P) loans, also known as "social lending" or "crowd lending," are loans from other individuals. Financial institutions are cut out as the middleman. Many websites facilitate P2P loans between individual borrowers and lenders.
4. Payday loans: Payday loans are short-term high-interest loans typically due by your next payday in a single amount. Currently, 37 states regulate payday loans due to high costs. A typical two-week payday loan can have annual percentage rates (APR) as high as 400%. In comparison, credit card APRs can range from 12% to 30%. Payday loans should be seen as a last resort.

Secured personal loans

A secured personal loan is backed by collateral. Examples include auto loans and home equity lines of credit. Secured loans typically have lower interest rates and are easier to qualify for than unsecured loans. Financial institutions put a lien on your collateral, so they can seize the assets being used as collateral if payments aren't made. Here are more types of secured loans that can be used for a wedding:

1. Secured personal loan: With this type of loan, you deposit cash into an account to be used as collateral. The borrower will borrow against the collateral and pays the principal and interest back to the lender. 
2. Secured credit card: Similar to a secured personal loan, you deposit cash into an account to be used as collateral. The borrower will get a line of credit equal to the amount deposited. 
3. Home equity lines of credit: A home equity line of credit (HELOC) is a revolving loan that is secured by the equity in your home. You can use the funds like a credit card, on an as-needed basis.
4. Home equity loans: Like a HELOC, a home equity loan is collateralized by the equity in your home. With a home equity loan, however, you receive a lump sum of cash. You will need to pay back the loan in regular monthly payments.
5. Pawn shop loan: Pawn shop loans are short-term loans secured by an item value people get at pawn shops. Since they are backed by the item, they are cheaper than payday loans but are more expensive than a conventional loan. Pawn shop loans are regulated by the government. 

Which is the best personal loan for a wedding?

According to LendingTree, almost half (47%) of newlyweds who went into wedding debt say money caused them to consider divorce, compared to just 9% of couples who did not go into debt for their wedding. So ideally, it's best to avoid going into debt for a wedding.

If you decide to take out a loan, a secured loan such as a HELOC may be best since it will typically offer the lowest interest rate. If you do not have the collateral to back it up, shop around to find an unsecured personal loan that offers the best interest rate and terms. Many brick-and-mortar and online banks allow you to prequalify on their websites.

Personal loans typically range between $500 and $50,000. For both secured and unsecured loans, your credit score will be an important factor on the interest rate and loan terms you receive. Improve your credit and have your financial documents in order before you apply. Avoid payday loans to avoid extremely high interest.

If you are using a credit card, be careful not to max it out. Credit agencies want you to keep your total credit utilization rate below 30%. This means if your credit card limit is $10,000, don’t spend more than $3,000 on that card. A low credit utilization ratio is an indicator you're managing your credit responsibilities well. A higher rate, however, is a flag to potential lenders or creditors that you're having trouble managing your money and could impact your credit score. If you have to make a big purchase like a wedding, call your credit card company to see if they will increase your limit and look at reducing your interest rate. 

Your wedding is an important day in your life. You will want to balance out the expenses with having the wedding of your dreams. One in four couples reported wishing they had spent less on their wedding. Keep a budget and prioritize the costs that are most important to you and your partner. This will help you keep your budget on track when you’re tempted to splurge. Keeping your costs reasonable and getting the right type of personal loan can help you avoid some unpleasant money-related fights.