3 Ways to Finance an Engagement Ring

— -- intro: The average engagement ring ran $5,598 in 2013, according to the TheKnot.com. That’s no small chunk of change. While it’s ideal to save enough to pay cash for a ring, there may be times you just can’t — or won’t — wait.

What are the best ways to finance an engagement ring? Here are three, along with the pros and cons of each.

quicklist:title: Loans From Friends & Familytext: Grayson Bell was a college student when he decided to propose to his girlfriend (now wife). But with a part-time job as his only source of income, paying cash for a nice ring was out of the question. While discussing the dilemma with his mother, she offered to loan him the money. It turned out to be a smart move. “She had contacts at a prestigious jewelry market in another state,” he recalls. “She was able to get a ring at 60% off the appraised value. It was a great deal and a custom ring specifically designed for my wife.”

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Bell and his mother set up a formal arrangement from the beginning, “We created a contract with payment terms, due dates, and when the loan needed to be paid off. I had to pay her back monthly and at least the minimum payment we agreed to. If I missed a payment or it was late, there was interest applied. It was much like a bank loan.”

Bell is a personal finance blogger now, and shares how he dug out of $50,000 in credit debt on his website. But at the time he was just a student who needed to find a way to finance his engagement ring. “All in all, the experience was a good one,” he says. “Looking back now, I realize I should have waited to just save up for the ring, but in my college years, I wasn't thinking about that or my financial future. I paid off my loan on time and thanked my mother for what she did.”

The advantage of one of these loans is that they can carry an interest rate as low as 0 percent, and can be very flexible. They don’t appear on credit reports, which can be a plus (or minus — if you need the credit reference to build credit).

The downside? If you can’t make payments there’s likely to be a rift between you and the lender that could strain the relationship with someone you love.

quicklist:title:In-Store Financingtext: Most major jewelers offer financing plans, some of which feature 0% interest for a limited period of time. For example, Jared offers interest-free financing for 12 months, or 12 months at 0 percent followed by low-rate financing for six months. Kay Jewelers offers 12 months interest-free. Blue Nile offers no-interest financing for six and 12 months, or equal payments for 24, 36 or 48 months at 9.9 percent (the time period depends on the amount financed). Zales offers 0 percent interest for six, 12 or 18 months, again, depending on the amount charged.

All of these offers require opening a new retail credit card. This new account could affect your credit scores, especially if the line of credit they give you is not significantly more than the amount you charge. That’s because credit scoring models compare your available credit to your balances to get your “debt usage ratio.” If your balances total more than 20 to 25 percent of your available credit on any individual credit card (or on all of them together), your credit scores may suffer. In other words, if they approve you for a $5,000 line of credit and you spend that much on a ring, your account will be maxed out from the beginning — and that can hurt your scores.

The other big “gotcha” to watch out for is that under some of these plans you may lose the interest-free financing and be charged interest from the date of purchase (often at a high interest rate) if you fail to pay the balance in full by the time the promotional period ends.

quicklist:title: Personal Loanstext: A personal loan can be an alternative to opening a new credit card. While you won't get interest-free financing that way, you may qualify for a loan with a low fixed rate lasting for anywhere from 12 to 48 months. The advantage to this type of financing is that you'll have a fixed monthly payment, and know exactly how much you need to pay each month until the loan is paid off. In other words, there is no risk that you will see your rate skyrocket if you fail to pay off the balance when the promotional rate expires.

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As with all types of engagement ring financing, there are a few things to watch out for, though. Your interest rate will depend in large part on your credit scores; the better your credit, the lower your interest rate. If your credit isn’t strong, you may wind up with a higher rate. (Think of interest as the opposite of a discount on the ring. Instead of paying less, you pay more.)

Here are a couple of examples of how much interest can cost you over the term of the loan:

$5,000 loan at 10 percent for 3 years

• Total cost: $5,808.24
• Payment: $161.34

$5,000 loan at 12 percent for 5 years

• Total cost: $6,673.20
• Payment: $111.22

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Borrow Smart

Whichever method you choose to finance an engagement ring, review your credit reports and scores before you apply for the loan. And be sure to read the fine print so you understand the terms of the loan. Paying more than you expected is stressful, and you’ll have enough stress planning — and paying for — your wedding!

Any opinions expressed in this column are solely those of the author.