Q: My husband and I are going to start our surrogacy journey soon and need to take out a loan to cover the expenses. What type of surrogacy financing should we seek? Should we borrow against our house, our 401k or consider an independent financing company like Prosper or Lending Tree? Or perhaps set up a Go Fund Me page? –Kim, CA
A: Hi, Kim! That is a great question. There are many types of loans out there and they can be confusing. Most consumers think only of interest rates and monthly payments. While those are important for budgets, they are not the only thing to think about. In my time as a loan officer at a national bank and as a CPA, I have seen terrible circumstances for borrowers. “What is the worst that can happen?” is the thought you should consider before signing on the dotted line. I am going to list the pros and cons of each type of loan in the order I think you should try them.
Go Fund Me Page
These are great for people who have friends and family who want to contribute to their surrogacy journey. There are no interest charges or funds to be paid back. We can even garner support from strangers who understand the process.
- Free Money from Friends and Supporters
- Personal Privacy Concerns
- Funds can take time to accumulate.
401k IF You Have a Home Equity Line As Backup
401k loans are great in theory. You borrow the money from yourself and pay the interest back to yourself. The problems come when a person decides to leave the job they are in and transition to a new company. The 401k Loan would then become due immediately upon exiting their current employer. If you have a home equity line as backup, then if you are terminated or you decide to leave the company, you can pay back with your line of credit.
- Easy Access to Capital
- Paying yourself the interest on the loan
- No Credit Check
- Can be a nightmare if you do not have a financial backup plan.
- Can potentially miss out on a bull market.
Home Equity Line
I normally never suggest using a home equity line for personal/medical expenses. In the 1980’s it was popular to buy cars under home equity lines due to the attractive interest rates and the deductibility of interest on tax returns. An unforeseen circumstance happened to those who could not make their car payments. When you normally stop paying on a car the bank will typically just come and repo the car. When you put the loan on your home equity line they will foreclose on your house! A much different worst case scenario for the average car buyer. The bank is able to make a huge profit from selling your former house and there isn’t much recourse that can be taken. The same thing applies to surrogacy. However, in my opinion bringing a child into your life qualifies for taking a risk. Just be careful of the anecdote above with this type of loan. This happens more than you think.
- Quick Loan Processing Time
- Easy to Qualify For
- Great Interest Rates
- Could potentially lose your house if you fall behind on the loan
Lending Tree or Prosper.com
Lending Tree and Prosper are a great because they specialize in alternative loans. The process is simple through their respective websites. You will need above average credit to get many of the riskier loans but they provide fair interest rates. There is not a lot of recourse on these loans unless you guarantee collateral for the loan. Depending on individual state law, they can put a lien on your home or even force you into foreclosure. Some states do not allow creditors to foreclose on personal homes. If you do live in a state where they can foreclose, you would be better off looking at a home equity line.
- Excellent Process
- Easy to Access Funds
- Higher Interest Rates
- Look at state laws to see recourse
401k WITHOUT Financial Backup
This loan is almost always a terrible idea. According to recent labor department statistics most employees do not spend longer than five years with a company. Like previously mentioned, once you leave or are terminated for any reason, the 401k loan becomes due in full immediately. The will put an extreme amount of financial pressure on the parties involved.
- Paying Interest to yourself as opposed to a bank
- Too high risk for most people
In closing, if you are confused about the various options for financing surrogacy we highly encourage you to seek advice from a trusted CPA or financial planner.