Here’s how to pay for that engagement ring

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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-month 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.

Related: 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.

Pros & cons of wedding ring financing

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.

Pros & cons of buying an engagement ring with credit cards

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.

Buy Now, Pay Later Loan engagement rings pros and cons

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.

Jeweler Loan engagement rings pros and cons

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.

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.

 

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Paying tax on personal loans

 

There are plenty of reasons to take out a personal loan, many of which are totally financially savvy. For instance, you might be thinking about consolidating high-interest debts like credit card balances.

Or you might plan to borrow in order to repair the roof or remodel the kitchen to help increase your home value.

Maybe you’re considering taking out an unsecured personal loan to pay for an unexpected medical bill.

Whatever the case, personal loans can be a useful tool to help you cover expenses and stabilize your finances. Plus, they may be easier to qualify for than other types of loans and come with less red tape.

But as in all things finance, Uncle Sam wants his cut, too. So, as you consider your borrowing options, you might wonder about how taxes work on unsecured personal loans.

For instance, you may question if a personal loan can be taxed as income and whether you can get a personal loan interest tax deduction.

If you are trying to decide between several types of financing, reviewing the potential tax implications of each borrowing option can help you figure out a financing strategy that fits your situation.

In this article, we’ll cover things you’ll likely want to know about when it comes to tax on personal loans, including whether personal loans qualify as income, and whether the interest on them is tax-deductible.

Plus, we’ll cover some scenarios that can come with tax benefits that might apply to you and your loan. This way you’ll be armed with helpful knowledge useful when making the right borrowing decisions for you.

It is, however, important to note that we’re not tax experts. For any tax-related questions or advice, you’ll want to consult a tax accountant — and not a blog post like this one.

Related: A guide to understanding your taxes

 

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When you take out a personal loan, your lender agrees to loan you a particular amount, and you agree to pay that loan back over a set period of time with interest.

Which is actually good news on the tax front: Even though it seems like a windfall that you could be taxed on, it isn’t. Since you are agreeing to pay that money back, it does not qualify as income the way wages from a job would.

The only instance when money from a personal loan can be taxed as income is if your lender agrees to forgive the loan. Loan forgiveness can be a rare occurrence and typically occurs under the following circumstances:

  • You are renegotiating the terms of a loan you are struggling to repay.
  • You’re declaring bankruptcy.
  • Your lender decides to stop collecting on the loan.

This is called a cancellation of debt, and it can carry tax liabilities since you’re receiving the remainder of the loan without the caveat that you’ll be paying it back.

For instance, let’s say you’ve taken out a $10,000 personal loan and have paid back $8,500 of it when the debt is forgiven or cancelled. The remaining $1,500 that you’d no longer have to pay back can be taxed as income during the year it is cancelled.

Typically, your lender will send you a tax form (a 1099-C) stating the amount cancelled, which you must subsequently report to the IRS on your tax return. Again, this is a very, very rare circumstance, so it’s nothing to count on.

Bottom line: In most situations, personal loans are not taxable as income — but if your loan is cancelled or forgiven, the remainder of the loan amount that you’ve yet to repay can be taxed the same way regular income is.

 

Depositphotos

 

The IRS regulates which types of loans come with tax deductions. While there are some types of loans that have tax-deductible interest, unfortunately, personal loans don’t fit into that category.

The interest you pay on personal loans is not tax deductible. So, if you take out a loan and pay a few hundred dollars in interest over the course of your repayment, that’s not a cost that will reduce what you owe in taxes come April.

 

DepositPhotos.com

 

Although personal loan interest isn’t tax deductible, there are many other types of loans that do carry special tax benefits and interest deductions. For instance, student loan interest and mortgage and property loan interest can be deductible up to certain amounts, although there are some restrictions.

 

 

Michael Krinke

 

You may deduct up to $2,500 of interest on qualified student loans or the full amount you paid during the tax year,whichever is the lesser.

However, this deduction is gradually phased out as your income increases, and it is not available if you or your spouse can be claimed as a dependent on someone else’s tax return.

 

fizkes / istockphoto

 

In the majority of cases, you can deduct every cent of interest you pay on your home mortgage. The loan must be secured (that is, your home must be offered as collateral on the loan; this deduction will not work if you use an unsecured personal loan to cover some or all of the cost of your housing).

As of 2018, you can deduct the interest on up to $750,000 of a qualified home loan if married and filing jointly, or up to $375,000 of qualified debt for single filers. (These limits were lowered from $1 million under the Tax Cuts and Jobs Act of 2017, but if you signed your mortgage before December 16, 2017, you’re grandfathered into the previous limit.)

 

DepositPhotos.com

 

Some business expenses are tax deductible, and that includes the interest you pay on loans taken out for business-related purposes. However, you can also deduct business expenses you pay for using an unsecured personal loan, which we’ll dive into a little bit more deeply in the next section.

 

DepositPhotos.com

 

Although staying debt-free is standard financial advice, sometimes taking out a personal loan can be a smart money move, especially if you’re already dealing with high-interest forms of debt, such as consumer credit cards.

Debt consolidation, a financial tactic, which involves taking out one large loan to cover multiple smaller debts, may reduce your credit utilization ratio and potentially help you save money on interest, not to mention make your bill-paying schedule a whole lot simpler.

For example, maybe you owe $8,000 on one personal credit card and $4,500 on another credit card, both with high (and different) interest rates. With multiple bills coming due at different times of the month, chances are you’re only paying the minimum required amount on each of them, which means you’re paying them off slowly and paying a lot of interest.

However, if you were able to qualify for and take out a $12,500 personal loan at lower interest rate, you’d only have to worry about one payment date, and you might even save money on the sky-high credit card interest rates, which could simplify both your life and your finances.

Personal loans (home improvement loans) can also help you get started on major home renovations, which may increase the value of your house and help you earn back your investment in the form of equity.

Learn more:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636  Opens A New Window.. For additional product-specific legal and licensing information, see SoFi.com/legal.

 

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