Getting a Loan During Divorce: Your Options for Financing Legal Fees & More

Going through a divorce can be extremely expensive between legal fees housing costs taxes, and dividing assets. For many, the costs quickly add up and deplete savings. Taking out a personal loan during divorce may help you cover these expenses now and pay the money back over time.

In this guide we’ll explore the top options for divorce loans, pros and cons tips for qualifying, and how to make the borrowing decision that’s right for you.

Why People Get Loans During Divorce

The average total cost of divorce ranges from $15,000 to $30,000 in the United States, according to surveys. Some of the common reasons people seek financing during the divorce process include:

• Paying legal fees – Attorney fees often make up a large portion of divorce costs. Loans help cover retainer fees upfront and billing throughout the proceedings.

• Maintaining housing – If selling the marital home, loans can provide a down payment on a new place Or if keeping the home, financing could buy out your spouse’s equity

• Taxes – Dividing retirement accounts and selling assets can trigger taxes. Loans assist with covering tax bills.

• Everyday costs – When separating finances from your spouse, you may need help covering living expenses.

• Compensating your spouse – You may need to buy out your spouse’s share of assets like a business. Loans allow you to make these payments over time.

While no one wants to take on debt during an already stressful time, loans allow you to cover divorce costs you can’t pay out of pocket.

Types of Divorce Loans

If you’ve decided financing may be necessary for your divorce, you have several loan options to consider:

Personal loans – Unsecured personal loans from banks, credit unions, and online lenders offer fixed amounts from $1,000 up to $100,000 typically. You’ll repay these over 2 to 7 years. Interest rates vary from around 5% to 36% depending on your credit.

401(k) loans – If your retirement savings are in a 401(k), you may borrow up to 50% of your vested balance or $50,000. 401(k) loans avoid credit checks and offer low fixed interest. But you lose retirement investment gains and face penalties if you leave your job before repaying.

Home equity loan/line of credit (HELOC) – These loans allow you to borrow against the equity in your home. HELOCs offer flexible draw periods and often have lower interest rates than personal loans. But they put your home at risk if you can’t repay.

Credit cards – Balance transfer or low-rate credit cards provide quick access to funds. But variable rates typically rise over time, raising your long-term costs. Manage card debt carefully.

Family loans – Borrowing from relatives or friends sidesteps credit checks and offers flexible terms. Define the loan details upfront to avoid potential conflicts.

Evaluate both pros and cons when deciding which type of divorce loan works for your situation.

Pros of Using Loans to Pay for Divorce

Taking out a personal loan or using other financing methods during your divorce can offer many benefits:

• Access funds quickly – Unlike saving up over months or years, loans provide money now when you need it most.

• Lower upfront costs – Paying retainer fees and other lump sums upfront can be a huge burden without financing help.

• Fixed repayment terms – Personal loans offer flat monthly payments over a set period, allowing you to budget the repayment into your finances.

• Potentially lower interest – An affordable personal loan or 401(k) loan may charge less interest than high-rate credit cards.

• Build credit – Managing loan payments responsibly helps establish positive payment history and credit mix.

• Tax benefits (401(k) loans) – 401(k) loans don’t count as distributions, so you avoid taxes and penalties. The interest also goes back into your account.

For those with good credit, reasonable borrowing during divorce can be beneficial both logistically and financially.

Cons of Getting a Divorce Loan

On the other hand, divorce loans do come with risks to weigh:

• Credit damage if denied – Loan applications often require hard credit inquiries, which could temporarily lower your scores if you don’t qualify.

• Debt burden – Poorly managed loans create long-term debt that strains your post-divorce budget.

• Risks of default – Failure to repay your loan on time tanks your credit and may lead to penalties.

• Compounding interest – The longer you carry debt, the more interest builds up, increasing the total repayment cost.

• Home equity risks (HELOCs) – Not paying your HELOC could allow the lender to foreclose on your home.

• 401(k) lost investment gains – The money you borrow isn’t earning investment returns, lowering your retirement funds.

Avoid borrowing more than absolutely necessary. Have a repayment plan before taking out divorce loans.

Tips for Qualifying for a Divorce Loan

Your credit, income, and existing debts determine if you’ll qualify for a personal loan with decent rates during your divorce. Here are tips to boost your odds:

• Check your credit – Inspect your credit reports and try to correct errors. Aim for scores of 670+ for the best rates.

• Lower credit card balances – High balances hurt your credit utilization ratio. Pay down cards to under 30% of their limits before applying.

• Document income – Lenders want proof of steady income. Provide recent paystubs, tax returns, and bank statements.

• Bring a cosigner – Adding a cosigner with good credit may help you qualify and get better rates if you have limited credit history.

• Shop lenders – Comparing loan offers from multiple banks, credit unions, and lenders may help you secure the best deal.

Maintaining good credit and steady income during your divorce proceedings will help you leverage financing to cover costs at affordable repayment terms.

Questions to Consider Before Getting a Divorce Loan

Asking yourself these key questions can help determine if borrowing for divorce is the right move:

• How urgent is my need for the loan? Could I save up or temporarily lower expenses instead?
• What will the monthly payment be? Does it fit within my budget?
• How much interest will I pay in total? Is it affordable?
• How long is the repayment term? Does the term work for my situation?
• How will new debt impact my credit scores and ability to borrow in the future?
• Do I have a solid plan to repay the loan? What if my finances change unexpectedly?

Thinking through both the short and long-term impact helps ensure you make a responsible borrowing decision. Explore all your options before choosing divorce loans.

Alternatives to Debt Financing for Divorce

While loans are often necessary to get through a divorce, also look at these options that could reduce the need to borrow:

• Ask for an advance on child support or alimony if possible.
• See if your attorney offers flexible payment plans over taking a large retainer upfront.
• Request community assistance from religious organizations or nonprofits.
• Negotiate with creditors directly for extended payment timelines on existing bills.
• Cut back discretionary spending to the minimum possible.
• Take advantage of credit card hardship programs if you can’t make payments.
• Use your own separate savings or assets to cover as many costs as you can.
• Lean on family for zero-interest loans before pursuing financing companies.

Every dollar you can cover without loans helps limit long-term implications of divorce debt.

Make an Informed Divorce Loan Decision

There’s no getting around it – Divorce can be extremely expensive. From legal fees to real estate to taxes, the costs add up quickly.

While no one wants to take on debt during an already stressful time, personal loans and other financing options do provide access to funds to get through the divorce process.

Carefully consider both the pros and cons of borrowing. Have a plan for managing loan payments within your post-divorce budget. And explore alternatives that could reduce the need for financing.

With some prudent planning, divorce loans can be an important tool to cover expenses now and get back on your feet financially after. But make sure you borrow only what’s absolutely essential, shop for the best rates, and have a strategy to repay the debt swiftly.