Availing a loan for your marriage? Keep these key points in mind

Millennials are keen to have a spectacular wedding for themselves but don’t generally look at its impact on their financials and future goals. We have one such instance of 26-year-old Nikunj Soni, an Ahmedabad resident who took a loan for his wedding in January 2017 from a nationalised bank.

He borrowed Rs 2 lakh at an interest rate of 15 percent for a 5-year term. With this borrowed amount, he organised lavish Sangeet Sandhya (dance and musical program) event before the wedding day to make his wedding magnificent for guests.

However, due to this burden of the loan, he is now paying monthly EMI of Rs 4,758 and in two years, up until now, has paid Rs 1.14 lakh (approximately).

By end of the tenure, he will end up paying Rs 2.85 lakh. Additional, Rs 85,000 (approximately) is interest on the borrowed amount. Upon seeing his financial burden, Soni realised that perhaps he shouldn’t have taken this loan

“I could have started a SIP to build contingency fund with this amount (instead of the EMI) for my ageing parents or invested for future goals instead of servicing this EMI for five years. I made a financial blunder by borrowing for the wedding”, he says.

According to a survey conducted in June 2018 among 500 young respondents by online wedding planning services firm, the Wedding Brigade, 33 percent of the millennials want to spend under Rs 10 lakh, 35 percent want to spend between Rs 10-25 lakh, 4 percent are keen to spend over Rs 1 crore on their wedding.

This excludes additional expenses of honeymoon that adds Rs 2 to 4 lakh due to an international trip as the first preference by millennial couples.

When it comes to paying for the wedding, 42 percent wedding couples intend to contribute along with help from their parents, 32 percent prefer if their parents pay for the extravaganza, and 26 percent said they would like to pay solely from their own savings, as per the survey.

With wedding costs that high, an online survey in March 2017 from Tata Capital, the financial services arm of the Tata Group, revealed that a majority—58 percent of those surveyed—considered taking a wedding loan, to partly or fully finance wedding expenses.

In this survey, close to 2,500 respondents, including married, single and to-be-married individuals, were interviewed.

Millennials seem to believe wedding loans are a convenient and easy way to finance wedding by borrowing from banks, Non-Banking Financial Companies (NBFCs) or online fintech companies (includes peer-to-peer platforms).

Let’s see how these wedding loans work, pros and drawbacks of this loan, alternate ways to pay for your wedding and more.

Wedding loan is a form of a personal loan that is to be avoided

Wedding loan is a part of the vast umbrella of varied personal loans offered by financial institutions and fintech companies. Some of the financial institutions offer standalone “wedding loan” scheme.

However, in case you don’t find the wedding loan scheme in your bank brochure still, you can take a personal loan and specify the reason as wedding while borrowing.

Wedding loans are an unsecured personal loan that you can take for wedding expenses ranging from booking venue for the wedding, catering and decoration expenses, buying gifts and jewellery, etc.

Gaurav Gupta, co-founder and CEO of the online aggregator of financial products and services said, “Typically banks may lend up to 22 times of the net take-home monthly salary of the borrower as wedding loan.”

Other eligibility parameters include age, minimum net take-home salary, credit score, reputation and size of the company working for and residence stability. In case, the borrower has a good credit history and score, the lender will offer a wedding loan with an apt interest rate analysing the profile of a borrower.

Sapna Tiwari, Co-Founder and COO, Rupeewiz Investment Advisors said, “Using a loan for wedding isn’t advisable. Since it’s the most expensive way to get married. Immediately after marriage, you’ll start paying interest cost on the money borrowed which may be a burden.”

Millennials and their family feel an extravagant wedding is necessary due to pressure from society, friends and family. Rachit Chawla, Founder and CEO of lending and investment advisory platform Finway said, “A wedding loan should only be preferred when the borrower has no financial obligations to pay from the past and is fully able to pay it off completely in the loan tenure.”

Tiwari suggested, “Before going into a debt trap with wedding loan to afford your dream day, consider cutting costs and bring your wedding expenses in line with your budget.”

Bank charges hefty pre-payment penalty

Typically financial institutions have a lock-in period of six months to one year in wedding loan/personal loan for wedding purpose. Prepayment of the loan is possible after lock-in period and bank charges prepayment penalties on early repayment. For instance, ICICI Bank has a lock-in of six months and prepayment charges are 5 percent. These charges can differ from bank to bank.

Gupta said, “In case, marriage gets cancelled after taking a wedding loan for any particular reason, and borrower chooses to repay the outstanding loan. She will also have to incur prepayment penalty charges as defined by the bank at the time of taking a loan.”

Not all financial institutions and fintech charge for prepayment from the borrowers. This includes Axis bank, fintech such as LenDenClub, Faircent, MoneyTap, etc.

Avoid taking a joint loan for wedding

A peer-to-peer lending firm, LenDenClub calculates eligibility based on the income of both husband and wife for a wedding loan. It may help them to get a higher amount in wedding loan for the marriage.

However, financial advisors don’t recommend to take such joint wedding loan. Because you may end up taking a higher amount for a wedding that may not be affordable in future. Further, jointly if you can’t repay the monthly instalment regularly then it impacts the credit history of both the borrowers. Also, borrowing in future for house or car may be difficult.

Key factors to keep in mind while applying for a loan

Estimate the amount of equated monthly instalments you can comfortably service considering your existing savings and monthly income. Compare wedding loan offers from multiple banks and NBFCs then choose the offer that most suits you. There can be significant savings in interest, processing fees and other charges by comparing and choosing the loan scheme carefully.

In case, you plan to apply for a wedding loan despite knowing the drawbacks as discussed, then look at leading private or public sector banks since they offer loans at attractive interest rates compared to NBFCs and peer-to-peer lenders.

Gupta said, “Loans from NBFCs and peer-to-peer come at fairly high interest rates as compared to that of banks because these lenders charge a risk premium to lend to the borrowers.”

Few alternatives to escape wedding loan

By presenting our expert opinions, we have already spoiled your grand wedding plans with loans. Just because loans are on offer, doesn’t mean you should take one.

A wedding may be a dream but it shouldn’t result in a debt burden. On account of that and the fact that these loans are expensive, Moneycontrol does not recommend wedding loans. Here’s how you can make alternative arrangements to ensure you have enough cash to have a good wedding.

-Cut the wedding cost

Millennials should use innovations to cut down their wedding cost if it’s going beyond budgeted expenses.

Sanna Vohra, Founder and CEO of online wedding planning services firm, The Wedding Brigade suggested some ideas to reduce costs, “This includes online booking of big-ticket vendors by comparing their offerings and packages (for catering, photography, decoration, etc.), online shopping or renting of wedding outfits, sending online invitations to guests, and more.”

-Invest smartly for your wedding

In case you have a couple of years for your marriage, then build a corpus by investing in financial assets like debt funds or corporate fixed deposits which are giving decent interest rates at present.

“If, your wedding goal is more than three years away then prefer investing in large-cap or multi-cap mutual fund schemes. However, avoid equity mutual fund schemes if wedding goal is under three years since it’s a risky asset class,” said Harshil Morjaria, Mumbai-based certified financial planner of ValueCurve Financial Solutions.