Buying a Diamond: Should You Finance the Love of Your Life?

05/19/08 posted by Lazy Man

Two and a half years ago, I did something that would make many personal finance gurus scream. I took out a home equity line of credit to buy a diamond ring. I put my home on the line so that I could show the woman I love that I wanted to spend forever with her.

Before we get into that decision, I want to note a few things about the diamond industry in general. The reason a diamond is worth as much as it is today is due, in part, to two things - a great marketing campaign by De Beers combined with their ability to limit production through a near monopoly. Secondly, diamonds and precious metals are two very expensive things that serve no tangible purpose for the average individual. You can’t watch American Idol on them, they don’t keep you warm in the winter, and they don’t transport you from one location to another.

If you can’t tell, I’m not really a fan of the diamond industry. So why would I go through such drastic measures as putting my home on the line to buy my girl’s engagement ring? There were a couple of factors
to consider:

As much as I hate to admit to admit it there’s a social and cultural aspect to getting engaged nowadays. When four of friends have gotten their future wives big shiny rocks, there’s no way to not
do the same without looking cheap. Put another way, because everyone else has jumped off that bridge, you are expected to as well.
It made financial sense. I knew that if we were engaged my future wife would not have a problem with moving in with me (we had discussions about moving in together in the past). However, as my girlfriend, I could see how she’d want a sign of commitment before making that big step. Moving in together saved us each quite a bit of money. My future wife could rent out her own home, covering her mortgage, condo fees, and property taxes. We would share the costs of living in one place, which reduced my mortgage payments and utility bills (especially telephone and cable television). I did the math and found that I would break even financially after about 7 months of
living together. After that we’d be saving money each month.

Taking those two factors into account, I took the plunge - a slow, calculated plunge. I went to learn everything there was to learn about buying a diamond and it took me nearly three months. I started off at the Jewelry Exchange, a national chain that promises discount prices. I found their prices to be the best that I could buy locally. I looked on Amazon which had one of the best diamond finding tools I’ve seen. I went to Costco and Blue Nile on a tip that I read in a newspaper. Those places had good prices, but not “the best” price. Here are the tips that lead my appraiser to exclaim, “I can’t buy a diamond of this quality for that price on the New York Wholesale Diamond Exchange!”:

PriceScope Forums - These are great forums and people who have no vested interest will help a new person like me learn more.
PriceScope Cut Adviser - If you have the dimensions of the diamond you can find out if it really is the great cut that a jeweler says it is. From the forums, I learned this is the most important “C” of the 4 C’s (carat, cut, clarity, and color).
PriceScope Diamond Search - The last of my PriceScope links, allows you search many diamond retailers at once and compare prices. Yes, I bought my diamond on the Internet, but I made sure the company was publicly traded and in good standing with the Better Business Bureau. I also made sure that the people in the PriceScope forums have had great experiences with the retailer in the past. If you are doing this be very, very sure to get it appraised.
Think about going with lesser color and clarity to save thousands. From a distance people notice the size, so that was important to me. The cut affects the way light reflects off the diamond and I felt that
to be very important as well. You can only notice that the diamond is of lesser color when compared to another diamond. I found that S1 clarity in many cases was a sweet spot where most people could see any imperfections with their naked eye and still cheap.
Buying a loose diamond on the Internet can save thousands, but it’s often wise to buy the ring and get it set locally. Having a local relationship with a jeweler is valuable. You may need to have the ring cleaned, polished, or serviced someday. You’ll want them to know your name.

When I was making the decision to finance my ring, a home equity line of credit got me the best rate - around a 7% interest rate at the time. While I was happy with that, I would have preferred not putting
my house on the line with a secured loan like that. Prosper wasn’t around at the time, but if it was, my good credit would have gotten an unsecured loan at 8-9%. If I had to do it again, the extra percentage point or two would have been worth it for piece of mind of knowing that my home was safe.

Is it right for you finance an engagement ring? I think you have to answer that question for yourself. One could quite easily question the decision to start off a life together in debt. On one knee, no one man ever says, “Here’s a symbol of the debt that I’m in. Would you marry me and my debt?” That said, I think there’s a happy medium to be found - and that might mean saving up money until the time is
right to propose.

—

Lazy Man has been a lender at Prosper since February 2006. He is the author of the personal finance blog, Lazy Man and Money and the health and fitness blog, Lazy Man and Health.

Posted in Personal Finance Education, Wedding and Engagement

11 Responses

David | May 19th, 2008 at 12:45 pm

Beware of the Jewelry Exchange. They guarantee that their jewelry will appraise for double but only if you use one of their appraisers at their inflated price.

My brother bought a diamond solitare from them and had it independently appraised. It was appraise for about 20% less than he paid.

So he tried to return it but they wouldn’t because they claimed it was not properly appraised and the diamond was probably switched out by the appraiser that was not on their payroll.

Only after he retained the services of an attorney that they gave him a refund.

tiptopper | May 19th, 2008 at 2:57 pm

my Mom had a plain gold band
She and Dad stuck till death do you from 1938 till
1969
Her second, Jeff gave Her diamonds, she left them in the cup holder in her car…………..
till they were swiped.
they stuck 1971 till 1991
ROCKS DON’T MAKE LOVE people do.
d

Writer's Coin | May 19th, 2008 at 6:30 pm

I was just talking with a coworker about this. Until you’ve gone through it, you can’t understand all the social implications that come with buying an engagement diamond. As a man too there are some things that come into play regardless of what your potential spouse thinks/says she thinks about diamonds.

No matter what, it matters.

Chief Family Officer | May 19th, 2008 at 11:02 pm

I think it’s great that you did this, actually. Well, maybe not so much that you got a home equity loan, but the idea of the loan itself makes complete sense, at least to me. Then again, I took out a car loan that I paid off in two months. I love that you crunched all the numbers and paid the loan off in seven months (you did pay if off, right?). And I love that you wanted to get engaged and didn’t want to wait. It’s rather romantic

Tim | May 19th, 2008 at 11:31 pm

I would be seriously running away from your appraiser if he made such a comment like “I can’t buy a diamond of this quality for that price on the New York Wholesale Diamond Exchange!”, because it is hogwash. there is absolutely no such thing as a wholesale diamond dealer and any dealer claiming to be a factory direct or wholesale dealer is selling you a bunch of crap. that’s not how the industry works. second, i did a quick comparison of jewelry exchange and blue nile and they are either the same or blue nile is less, but it is difficult to compare since the jewelry exchange doesn’t list all the diamond information which is the thing i dislike about the jewelry exchange, and is necessary when you are comparing diamonds from one place to another. to me, i would question why they would not show the entire info. to me, most people would think that all 1c, vv2, d, ideal cut, gia certified diamonds are the same, but what the jewelry exchange omits are symmetry and polish which also heavily influences price. instead of the 4Cs that everyone talks about, you should be look at 4C+polish+symmetry and to a lesser extent culet, flourescence, and girdle.

second, i would also second david’s comments about the jewelry exchange. any shop that is so gimmicky is something to be weary of. also, i would not use the free appraisals from the place you purchased the diamond. i would go to an independent certified gemology appraiser. if dealer says that their diamond would appraise for double, that is a sure sign not to buy into it. why? because the insurance company will go on replacement cost and the replacement cost is going to be probably less than what you even paid at the jewelry exchange or any other shop because the insurance company has the benefit of volume whereas the individual consumer does not. diamonds are something that is worth paying an independent appraiser so you aren’t paying extra for insurance coverage. if you go off of the double appraised value, that means you are at least paying double too much insurance for what your ring is actually worth. a certified appraiser will cost $150-$300 per hour with a solitaire taking an hour. i’d be looking for at least someone that is a gia certified gemologist (but more than entry level gia cert), but prefer someone that is also ASA/ISA and NAJA certified. if you maintain a relationship, you should only have to get reappraised every 3 years (unless there was a major change in the jewelry) and the appraiser should give you discount of half within that time period for a reappraisal.

i like pricescope a lot and it is a great resource and points all of this out.

i was confused when you highlighted does serve tangible purpose, because you listed ways that it doesn’t right afterward, did you mean does NOT serve tangible purpose for individuals? if so, then that is wrong, because both precious metals and diamonds serve individuals immensely since they are everything that you use either physically or in manufacturing.

regardless of anyone’s feeling about the diamond industry/de beer’s, unlike precious metals, diamond prices are at least stable, so from a practical point of view, if you wanted to sell, you aren’t going to eat depreciation.

RateLadder | May 20th, 2008 at 11:13 am

Thanks Tim.

I think lazy did mean no tangible purpose and I have made the change.

And I agree. Gold and other precious metals are used in the manufacturing of electronics.

I watched a documentary about how a ingenious company was mining old electronics at a precious metals $ per ton that was triple the best producing ore.

Lazy Man and Money | May 20th, 2008 at 11:55 am

I think it also the Jewelry Exchanges policy that only the diamonds under a certain price will appraise double. I believe that price is $3000, but I’m not sure. In any event, I can’t say I had a bad experience with them. I even used them as my local jewelry to get it set.

@David, I’m very surprised they suggested that your brother switched out the diamond. They should be willing to verify that it was the same diamond in-store and for free.

@tiptopper, insurance is a beautiful sometimes.

@CFO, I did pay the loan back. It took me longer than seven months, but only because I had chosen to continue to invest heavily in my 401K plan which earned more than the interest I was paying at the time. It was a calculated risk, but one where I wasn’t going to lose a lot either way. I don’t recommend other people follow that example.

@Tim, The appraiser showed me his computer screen and prices… I think he was referring to the New York Diamond Dealer’s Club. In any case, he had no motivation to spend hours creating an illusion of one on the off-chance that I’d come in with a good value ;-).

The appraiser I chose had the PriceScope recommendation of many. Even so, I checked with my insurance to make sure they would approve his appraisal beforehand. If it’s good enough for them, it’s good enough for me. Also he has most of the certifications you mention.

I meant “does NOT serve a tangible purpose” (thanks for the fix RateLadder). Perhaps I should have used the word “direct” instead of “tangible”, but I wanted to make the point that the average person isn’t going to use the diamond for manufacturing or any tangible use like that. They may serve the individual person indirectly, but that’s off the topic of love, engagements, and marriage. Unless my wife has a secret MacGyver life that I don’t know about, the diamond is going to spend the rest of our lives serving no purpose on her hand than a piece of glass or coal would.

phredy148 | May 21st, 2008 at 11:16 am

So you have to buy your girlfriend a big shiny rock because four friends did? What are you going to do when they divorce? Peer-pressure is a lousy reason to do most anyting.

Carol | May 21st, 2008 at 7:52 pm

My husband financed my engagement ring (at 0% for a year) - and then hid it in a closet while he paid it off. The week after he made the last payment, he put it on my finger.

Tim | May 22nd, 2008 at 9:42 am

Lazy,
I will say insurance companies will accept an appraisal from anyone and in fact don’t have a standardized requirement for an appraiser’s qualifications because there is no standardized certification for appraisals. Yes, there are ASA, ISA, and NAJA, but they don’t act as regulatory agencies for all appraisals. Moreover, the insurance company will gladly allow you to insure more for anything, but it comes down to “their” replacement cost for the insured item(s) (you can always over insure anything if you wanted to, but doesn’t mean you will be getting that full amount in return).

my insurance company “recommended” i get an appraisal from a gia grad, but that was only a recommendation not a requirement. this is why paying extra for an indie appraiser that specializes in the gemstone you are getting appraised is important. just because someone is a graduate of x doesn’t mean that he/she is right to appraise y. it may give you a warm fuzzy thinking that a jeweler appraised your diamond for double, but in reality it is only worth less than what you actually paid for it. for example, my initial appraisal was from a gia grad from the same company i purchased the diamond. it was appraised for nearly double what i paid. how can something be worth more than what i just paid at the same time i just paid for it? reality is, it isn’t. the appraisal estimate is based off of rappaport retail prices, and which i suspect is probably what was used by your appraiser in estimating retail appraisal value even though he went through DDC to show you; moreover, if your appraiser cannot find the same diamond in general, then they base the appraised value off of a virtual price range. if the place you purchased the diamond cost half as much as the appraised retail value, then it is obvious that the diamond can in fact be replaced for half the appraised value. companies that purchase large quantities of diamonds do get a discount over someone that is buying a couple at a time. the insurance companies are volume buyers. this means that you are over insuring, thus over paying insurance premiums, for your diamond.

again, i’m not saying blue nile or costco is the way to go, but i will say that the jewelry exchange isn’t the best either. i have a hard time buying from a company that tries to sell diamonds based off of myths like wholesale, double appraisal value, etc. it’s in the past for you, because you’ve already made the purchase; however, i would suggest a relook at the appraisal value and not get caught up in the warm fuzzy that someone is giving you by appraising the diamond twice the amount you paid for it if there hasn’t been an appreciable time for appreciation to kick in do to supply/demand or rarity of your diamond.

Lazy Man and Money | May 22nd, 2008 at 5:38 pm

@phredy148: I believe there’s a fine line between peer pressure and a non-optional social convention.

@Tim: I didn’t buy from the Jewelry Exchange, I looked at prices for months via their online website, my friends’ family jewelers, Amazon, Costco, Blue Nile, and a number of other places. You get a feel for what something costs when you have that much comparison. The lowest of all those came in about 50% more than what I paid for a comparable diamond.

I think the appraiser did value it up a bit, because he put it at 10% more than those other retailers, but all of them do that. It’s going to appraise for a similar anywhere (like you say, it’s all rappaport based). So I’m going to have to pay more premiums. I’m fine with that because there’s no alternative other than to not insure it.

I’m comfortable with the fact that the DDC prices were 15% higher than what I paid. I’m also comfortable with the fact that someone with 4,000 posts in PriceScope forums ended up putting my thread in the FAQ as an good example finding a “bargain”.