Welcome to the age of the “divorce loan."

By Alisa Wolfson
December 18, 2020
Credit: Getty Images

Not only are weddings being cancelled as a result of COVID-19 but, as we’ve previously reported, divorce rates are also spiking (thanks, quarantine)—and right when millions of people have less money to pay for that divorce. That means, in true 2020 fashion, people aren’t paying for their divorces the traditional way.

According to new data from the financial platform Loanry, there has been a 62% increase this year in the number of people searching for loans to fund their divorce. “2020 has been a stressful year, more stressful than most, and sadly we’ve it take its toll across the board, including in the marital home,” says Ethan Taub, founder of Loanry.com.

Divorce attorneys say they’re seeing a similar trend. “Oftentimes, the most expensive assets you have can be illiquid, such as real estate or business interests,” says NYC matrimonial attorney Jacqueline Newman—which can necessitate the need for a loan. Plus, divorce doesn’t come cheap: “It is typical for each spouse to spend $10,000 or more to complete their divorce,” Findlaw notes.

So what exactly is a divorce loan? It’s a personal loan that you use to cover the hefty costs associated with splitting; the loan’s rates and terms can be lowered based on a future divorce settlement. Arielle Jacobs-Bittoni, the chief wealth strategist at Refresh Investments, notes that a good interest rate on one of these loans would be around 4%.

Many people will take out loans to pay legal fees and living expenses when going through the divorce process with the understanding that upon the divorce, there will be a liquidity event that can pay these debts. “There are companies that specialize in divorce lending who will advance monies to a person going through a divorce to pay expenses and then analyze your divorce case to ascertain whether there will be sufficient liquidity to repay the loss,” says Newman.

Is a divorce loan right for you? Maybe. “If I were advising a client who is considering a divorce loan to get out of a marriage, I would absolutely tell them to consider the personal loan with the caveat that they need to have a financial plan for how to manage the loan repayment and also their future financial picture,” says Jacobs-Bittoni. She adds that it is often women who will stay in a marriage because they don’t feel they can support themselves financially on their own. Taking out a loan may simply be the only way for some to escape a bad relationship.

And Lauren Anastasio, certified financial planner at SoFi, says there are a few other reasons why personal loans may be a desirable way to fund the cost of the divorce. “The individual filing for divorce may not want their spouse to know until a petition has formally been filed, so leveraging money in joint bank accounts will typically raise some flags. Applying for and obtaining a personal loan is something you can do on your own, without a spouse’s involvement, assuming you have your own source of income,” says Anastasio.

Personal loans may also help you avoid penalties you’d get from tapping other investments like a 401(k) or IRA, and a personal loan can also allow for a quicker divorce process than if you were to wait and save up for it. “Living in an unhappy marriage is undesirable for countless reasons, so if you’ve come to the concrete decision that divorce is the route you’re ready to take, you don’t want lack of funding to be the reason you stay,” says Anastasio.

Of course, there are downsides to taking out a personal loan. You have to pay back the money borrowed plus interest, which can mean the divorce is pricier than you might think. And “the monthly payment may throw off your expenses and could jeopardize your savings, like 401(k) contributions,” says financial advisor Francesca Lagrotteria at Payne Capital Management.

What’s more, navigating the plethora of loan options can require the help of an expert. “An experienced professional can provide guidance on structuring the loan properly so it’s appropriate for someone’s personal circumstances and can help them achieve the life they ultimately want,” says Jacobs-Bittoni.