BackFunding a wedding? Don’t get tied into knots
Take a loan only in case of a shortfall, and that too a small one, because this is an expensive choice
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When 27-year-old Pune-based Ragini Gupta got married last November, her parents took care of all the wedding expenses. “My father has been saving for my wedding since I was 10 years old. He had invested in stocks and fixed deposits (FDs). He sold some of his stocks and also used the FD money to bear the cost," said Gupta, who works for an information technology company. The wedding was in Pune, and it cost around 15 lakh excluding the cost of jewellery and the wedding trousseau.
Mumbai-based Shonan Salvi, also 27 years old, is a special educator at Kohinoor International School. She is tying the knot in December. “My parents and I are pooling in money. We don’t plan on taking a loan," said Salvi, who will be among the many to get married during the upcoming wedding season.
Mostly, weddings are a lavish affair and since it’s an important milestone in one’s life, no expense is spared. Some are able to pay for the expenses on their own, and some take a loan for it.
Mint Money discusses various financing options available.
The expenses
Whether it is a local or a destination wedding, one with only family members or one where everyone is invited, the list of expenses is always long. “In case of a destination wedding, the main costs include logistics and venue. This includes travel, accommodation, local transportation, food and beverage (F&B), decor, gifting and entertainment. Then there are personal expenses such as jewellery, trousseau and invitations," said Neha Arora, partner and chief executive officer, Var Vadhu Wedding Management LLP, which organises destination weddings above 2 crore.
“Venue and F&B eat up almost 90% of the wedding expense," said Sandeep Lodha, chief executive office and founder, WeddingZ, a marketplace for wedding venues and vendors whose clientele spends 5-25 lakh on weddings.
To fund wedding expenses, banks and non-banking financial companies offer loans. These are of two types—unsecured and secured.
An unsecured wedding loan is nothing but a personal loan. Interest rates are in the range of 13-22% per annum, depending on the financial institution, individual’s eligibility, income and repayment capacity. The tenure for these loans usually goes up to five years, and the amount is in the range of 50,000-15 lakh. The prepayment penalty is 1-2.5% of the loan amount.
Govind Sankaranarayanan, chief operating officer–retail business and housing finance, Tata Capital Ltd, said, “The wedding loans range between 1 lakh and 15 lakh. The amount will depend on the borrower’s eligibility, income and repayment capacity."
A secured loan is similar to loan against property or security. For instance, Corporation Bank has its Corp Shubha Vivah Scheme. Here you have to either mortgage an immovable property or any financial asset such as National Savings Certificate, Kisan Vikas Patra, a Life Insurance Corporation of India (LIC) policy or term deposits. The loan-to-value ratio will vary depending on the collateral. The minimum loan amount is 1 lakh and maximum is 10 lakh, depending on where you stay (10 lakh in metros and 2 lakh in rural areas).
Another type of loan that people fall back upon is credit cards. Here, one has the option of converting payments for the bigger expenses into equated monthly instalments (EMIs).
“Usually, when you swipe your credit card for expenses above 20,000, the bank will give you the option to convert the expense into EMIs," said Rishi Mehra, founder, Deal4loans.com. “EMIs on a credit card is a cheaper option than revolving the credit," he said.
The interest rate on credit card outstanding is generally 36-42% per annum, and if you transfer the outstanding amount to an EMI option, the interest will come to 16-22% a year depending on the tenure you would be carrying this EMI.
“Apart from that, making payments in instalments will be less stressful in terms of monthly payments," said Rajiv Raj, co-founder and director, CreditVidya, a Mumbai-based credit advice and planning company.
Using credit also has an effect on the person’s credit score. High usage of credit card usually brings down your credit score. So, if you convert the outstanding into EMI, since the payments become regular, it benefits your credit score, added Raj.
But not everyone should opt for the EMI option. “Individuals who are struggling to pay the credit card outstanding and do not anticipate any additional income that they can use to foreclose the loan should go for EMIs. This option should be exercised while a person’s Cibil (Credit Information Bureau Ltd) score is good; otherwise, transferring the balance to EMIs will be a challenge," said Raj.
Also, check the processing fees and foreclosure charges before taking a call.
What should you do?
Financial planners are unanimous against taking a loan to pay for wedding expenses. “I would not recommend a loan for a wedding unless it is a small proportion," said Nisreen Mamaji, certified financial planner, and founder, Moneyworks Financial Advisors.
As it is with any other financial goal, one must plan in advance for wedding expenses as well. The first step is to arrive at a reasonable estimate. The goal may be much in the future or nearer. In either case, ask friends and family for rough estimates. “You can ask your friends and family who have recently got married or were involved in a wedding about the expenses. You can then take it as a ball park figure to start off with for your own or your child’s wedding," said Mamaji. Try to ask for details such as the separate costs of venue, transport, accommodation, F&B, and others. If the overall budget suits your pocket, you can continue as planned. But if it overshoots, then based on individual cost heads, you can trim your choices.
“When I chalk out a financial plan for parents, I don’t sketch out a child’s wedding kitty," said Mamaji. Instead, she looks at a wealth creation corpus that covers education, marriage and retirement as the main goals. “Simultaneously, factor in a wedding expense corpus to pull out from the overall corpus. Depending on the risk taking capacity of the individual, park the money in equity if it is a long-term goal," she added.
If you plan to self-fund your wedding, then also start creating a corpus early. “Mostly, you will know the approximate time a few months to a year in advance. Keep aside money from then itself. You could invest in liquid, short-term or ultra short-term funds. In case of short fall, you can borrow; but do remember that taking a loan is an expensive option as the interest rates are high and there are costs attached," said Surya Bhatia, a Delhi-based financial planner.
Given the importance of the event and the social connotations, many people dip into other funds, such as that for an emergency, loan closure, education for second child or even retirement. Avoid taking out money from long-term investment instruments such as provident fund or Public Provident Fund. While taking a loan is an option to cover a short fall, avoid taking one if you are close to retirement—you may not have an income to pay off the debt.
So, before you get to the ‘I do’, say ‘I don’t’ to the expenses you can’t afford.
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