Planning a wedding in India is not an easy task. Most families planning this occasion face a similar question: do they use their savings, or do they take a marriage loan? Both options can help manage wedding expenses. But they have different financial consequences. Taking a loan means paying EMIs regularly for at least a few years. But using personal savings also has hidden costs. Evaluating the total costs of both these options is essential to make an informed decision.
Understanding the Real Cost of Using Personal Savings
Liquidating existing savings, like fixed deposits, recurring deposits, or long-term investments, have their own costs. Most banks apply premature withdrawal penalties on breaking a fixed deposit before maturity. It reduces the applicable interest rate. This means that the depositor would lose a part of what he had earned.
Recurring deposits have a similar penalty structure. For mutual funds or stocks, early withdrawal may lead to capital gains tax or exit loads. These costs can reduce the overall returns from these investments. There is another cost that people usually don’t consider. Withdrawing an investment that was compounding over several years, prevents the capital from growing any further. Liquidating the investment leads to loss of potential future returns over the next 5-10 years. These returns could have exceeded the total interest costs of an equivalent loan.
What are the Costs of a Marriage Loan
A personal loan for marriage is an unsecured product with a fixed tenure of usually up to 5 years. The interest on the loan typically applies only to the outstanding principal instead of the sanctioned loan amount. The interest component of the loan decreases progressively as the EMI payments reduce the outstanding amount. The interest rates for personal loans usually range between 11% and 30% p.a. But the exact rate offered by a lender depends on multiple factors. This includes a lender’s internal risk assessment and the applicant’s credit profile, income stability, repayment history, etc.
Lenders also charge a processing fee for the loan. It is typically up to 5% of the loan amount, plus GST. This amount is deducted during loan disbursal. There may be further charges like prepayment fee, login and administration fee, etc. All these get added up to the total borrowing cost, along with the interest. Hence, prospective applicants should consider the fees and charges for a personal loan before applying.
Comparing Interest Costs Against Opportunity Costs
Most people assume that liquidating their savings is cheaper than taking a loan because it doesn’t involve interest costs. But that’s where they make a crucial mistake. Breaking an investment also has an opportunity cost. It is the future potential returns that investment would have earned if it were not liquidated.
If the funds were in a savings account with low interest, the opportunity cost would be minimal. But if they were locked into a fixed deposit, earning a competitive rate, the cost would be higher. It also applies to situations where the money was invested in financial instruments with historically higher returns than typical loan interest rates. Liquidating such investments early leads to a loss in terms of future returns. Hence, applicants should consider the opportunity cost before deciding to use their savings instead of taking a marriage loan.
Impact on Liquidity and Financial Preparedness
Liquidating existing savings to fund your wedding expenses also removes the financial safety net. As weddings come with unexpected expenses, using household savings to fund the entire function can be a financially risky strategy. Financial advisors usually recommend keeping an emergency reserve for household expenses of at least 6 months.
Lack of this buffer can become an issue in case of a medical emergency, job loss, or other unplanned expenses. Taking a marriage loan, on the other hand, helps keep your savings intact. It also spreads the entire wedding cost across a longer tenure with predictable EMIs. This means that families need not liquidate their emergency reserves for marriage related expenses.
Taking a marriage loan and repaying the EMIs consistently helps build the borrower’s credit history. A stronger repayment history also improves eligibility for future loans or credit cards. It also increases the chances of getting lower interest rates and better terms. Using personal savings to fund the wedding expenses will not build a credit history.
Tax and Penalty Considerations
The interest paid on a personal loan does not lead to any taxation benefits. Unlike housing loans, there is no tax offset on personal loan interest to help reduce the effective borrowing cost. In case the borrower misses an EMI payment, the lender may charge late payment fees as well.
On the savings front, interest earned on fixed deposits is fully taxable based on the depositor’s income slab. Banks deduct tax at source for such deposits once the interest income crosses the annual threshold. That reduces the effective post-tax returns. The returns on financial instruments like mutual funds and stocks are also taxable under the capital gains tax.
Penalties on early withdrawal are applicable for investments as well. Fixed deposits have a premature withdrawal penalty for breaking the deposit before maturity. Mutual funds also usually have exit load costs that the investor should pay in case of early withdrawal. Factoring these costs can help decide between liquidating existing savings and taking a personal loan to manage wedding expenses.
How to Decide Between Taking a Marriage Loan vs Using Personal Savings
There is no universally correct answer in such a situation. The right choice depends on multiple factors. Start by estimating the total wedding costs. Managing those expenses by using a small portion of your savings is one thing. But depleting the bulk of your funds for wedding expenses will have higher opportunity costs. In such cases, using a personal loan can help offset those opportunity costs.
Checking existing financial commitments is also important. Individuals already paying EMIs should only take a loan if the new EMI fits within their monthly budget. Lenders usually approve loan applications of individuals whose total EMIs, including that of the proposed loan, are within 40-50% of their net monthly income. Running these numbers beforehand helps make an informed decision while choosing between using your savings and opting for a loan.