If you’ve racked up a lot of holiday bills this year for items like travel and Christmas gifts, you might be considering getting a holiday loan to help pay those bills. Whether this is the right decision for you depends on several factors, from your credit score and your budget to the amount of money you have spent.
If you’re like most consumers, you’ll spend about $886 on Christmas gifts this year. This should be the average spend in 2021, according to Statista. And many of these items will cost more than in previous years due to high inflation.
Beyond that, you could spend extra money on vacation trips, which are also more expensive this year due to historically high gas prices. Many consumers will use credit cards to pay for various vacation expenses, which is expensive unless you pay off the balance immediately.
You might be wondering if a holiday loan or a Christmas loan is a good alternative to using credit cards to cover your holiday expenses. Before applying for a holiday loan, it’s a good idea to educate yourself on what it entails and what other alternatives there are. Keep reading to learn more.
How do holiday loans work?
A holiday loan, sometimes called a Christmas loan, is basically a personal loan that you use to pay for holiday expenses. These types of loans are offered by most banks, credit unions and other lenders. They are designed to facilitate the financing of the purchase of Christmas gifts, end-of-year celebrations, travel and other expenses related to the season.
Since most holiday loans don’t involve huge sums of money, they are often unsecured loans, which means you don’t need to post collateral to secure them.
How much can you borrow?
The amount of money you borrow for a vacation loan is not necessarily determined by how much you spend. The loan amount — and the interest rate — depends on many factors, including your income, credit score, and other outstanding debts.
But just to give you an idea of how much you might need, the average holiday debt incurred in 2020 was $1,381, according to a survey by LendingTree affiliate MagnifyMoney. These numbers are likely to increase this year given the high inflation.
What conditions can you expect?
This tends to vary, but as a general rule holiday loans usually involve fixed payments for terms of 12 months to six years. You’ll likely need a good score to qualify, unless you’re using a high-interest payday lender, which isn’t advisable. With most vacation loans, you’ll lock in an interest rate for a set period of time.
A Forbes Advisor analysis looked at personal loan terms for December 2021 from a variety of different lenders. Lenders that offered lower loan amounts — the type you’ll typically find with holiday loans or Christmas loans — offered a wide variety of terms and annual percentage rates.
For example, Discover offered APRs of 5.99% to 24.99% on personal loans starting at $2,500 for three to seven years. LendingClub had APRs of 7.04% to 35.89% on personal loans starting at $1,000 over three or five years. Avant had APRs of 9.95% to 35.99% on personal loans starting at $2,000 for two or five years.
You might be surprised how quickly some banks can process personal loans. With US Bank, for example, you can apply online without ever having to leave your couch, with no collateral required – and get your funds within one business day of closing. But not all lenders work so quickly. With some, it may take several business days for the loan to be granted.
What are the alternatives to holiday credit?
You don’t necessarily need to borrow money from a bank, credit union, or traditional lender to finance your vacation purchases. Here are some other alternatives.
0% APR Credit Cards
This is a good alternative to a loan, because you don’t have to pay interest on it, at least for a while. 0% interest won’t last forever. It’s usually offered for an introductory period, perhaps a year, before the full interest kicks in. If you want to use one to pay for holiday shopping, make sure you can repay the card for the term of 0% interest.
There are three types of 0% APR credit cards: those that charge 0% interest on purchases, those that charge 0% interest on balance transfers from other credit cards, and those that charge 0% interest on purchases and balance transfers.
Buy now, pay later
This was a fairly popular option back when it was called layaway buying. It made a comeback under a different system and the new moniker of “buy now, pay later”. This basically means you can put down a deposit on an expensive holiday or Christmas purchase and pay off the balance over the next few weeks or months, depending on cost and supplier. Platforms that offer the service include Affirm, Sezzle, Klarna, Afterpay and PayPal’s Pay in 4 product.
Just make sure you have enough money to make your payments on time or you could face late fees, insufficient funds charges, and interest on items you thought were interest-free.
Should I take out a holiday loan?
If you have enough cash to cover your vacation expenses — and it won’t take much of your daily budget — this is the best option. In exceptional circumstances, depending on your personal financial situation, a holiday or Christmas loan might be worth considering if you can get manageable terms. Before signing the loan agreement, here are some steps to follow to ensure you do not find yourself in a financial hole:
- Find the best rates, terms and payment options.
- Borrow only what you need. If you take out a holiday loan, make sure it only covers your holiday or Christmas expenses. Create a budget before applying for the loan so you know how much you need and make sure you’re comfortable with the monthly financial commitment when it comes time to repay the loan.
- Buy Christmas gifts to help pay off the loan before it comes due. Once you’ve checked off all the items on your Christmas list, put any savings into your loan to reduce the amount you owe. Check sites like Amazon, eBay, and Walmart to see if you can get this discounted gift. You can also save money by shopping at consignment stores and thrift stores, many of which offer quality second-hand items at great discounts to traditional retailers.
Alicia Bodine contributed reporting for this article.
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