Money - 6 Nov, 2019

How personal loan debts are jeopardising first home buyers

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Buying an engagement ring can be an exciting time, but usually, it comes at a cost – and we aren’t only talking about the price tag.

Couples buying an engagement ring via a personal loan could be substantially reducing their borrowing capacity with the added debt.

On average, an Australian couple spends $5134 on a ring, according to the 2018 Australian Wedding Industry Report.


For some, an engagement ring might be their most expensive purchase yet, and a personal loan may seem like the only way to afford the lump sum.

ME’s Financial Comfort Report revealed the average Australian saves about $862 each month or approximately $10,000 a year. Spending the average amount on a ring would mean over half of these savings are eaten up.

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And not everyone is doing so well, with one in two Australians having much less than $10,000 to spare. A quarter of households have less than $1000 in cash savings.

One report by ANZ’s 2018 Financial Wellbeing Study had a far grimmer finding, with 22% of respondents having no cash savings at all.

It’s no surprise approximately eight million Australians have taken a personal loan at some point in their life and for many, they have made life possible during the big moments.

Key life events such as weddings, car purchases, and travel are often supported by a personal loan. Those after an engagement ring are often first-time buyers, meaning a string of major payments are made in a few crucial years.

But the personal loan is only small?

We know what you’re thinking, a few thousand dollars can’t be that detrimental. While it may seem like a small loan amount to repay, any outstanding debt is heavily scrutinised by lenders.

On the assumption of the average priced $5134 engagement ring, this ring could end up costing $7000, factoring in five years of interest and fees.

Any ongoing repayment will slash your disposable income and in the eyes of your lender decrease your reliability as a borrower. If you have outstanding debt from a credit card, personal loan and home loan, the easiest way to make this less risky for a lender is to lower how much you borrow. This way, the chance of repayment is more reliable.

how-personal-loan-debts-are-jeopardising-first-home-buyers

“If it is a $10,000 loan, it may be $80,000 impact,” Rebecca Jarrett-Dalton, founder of mortgage brokerage Two Red Shoes, told Domain.

“It changes the type of property you can qualify for.”

Knowing this, couples should ask themselves what means more to them: their home or an engagement ring. 

What are the options?

One thing that’s certain is that you shouldn’t spend outside of your means.

When you think it is right to ask the question and you believe you’re in the financial position to do so, then you should take this next step.

It goes without saying, but the best way to buy a ring is to pay outright and spare yourself debt and interest.

Alternatively, a new trend emerging has seen couples put off buying an engagement ring until after they have secured a home loan. This way the extra debt does not dampen their borrowing capacity.

If this is not something within your reach, a personal loan may still be the best way to go.

When weighing up a personal loan against credit card debt, personal loans usually come with a lower interest rate. But couples should remember to factor in application fees and ongoing fees to these calculations.

The structured and fixed payments that come with a personal loan may be better to budget in the long term.

Words by Michelle Elias

Looking for a home loan deal? Contact eChoice today, and we’ll put you in touch with one of our friendly brokers who will be able to guide you to the best mortgage deal.

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