How to Finance Luxury Gifts for the Holidays

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How to Finance Luxury Gifts for the Holidays

With the holiday season in full swing, many consumers are turning to alternative methods of financing to fund their luxury gift purchases, according to Informa Research Services. Affluent consumers, who account for 25% of U.S. households (based on income), plan to spend on average $1,903 for their holiday gift purchases, cites a recent study by Unity Marketing.

With a household income of $149,100, luxury consumers with discretionary income can afford to be more generous with their gift giving this year. Even though automobiles, trips and gift cards continue to be the gift of choice, clothing, gourmet food and spa packages are increasing in popularity.

While consumer debt is at a record $2.7 trillion dollars, being debt-free can be a luxury in itself. However, if paying cash isn't an option, there are other (less expensive) ways to borrow that offer better financing than department store or dealer rates. Some of the other more popular methods include:

Home Equity Line of Credit (HELOC) - A HELOC is basically a line of credit that you make monthly payments on for the borrowed amount. Like a credit card, the interest rate is variable and tied to the prime rate plus a margin. The amount you qualify for is usually based on the difference between your current home market value and your outstanding mortgage balance. Primarily used for home improvement or debt consolidation, HELOCs account for 28% of consumer credit accounts according to a recent Home Equity Study conducted by the Consumer Bankers Association.

Home Equity Loan (HEL) - A HEL is a second mortgage. You are given a lump-sum of money upfront, which you pay back in installments over a fixed period of time, typically 10-15 years. While the time to re-pay a loan is shorter than a traditional mortgage (usually 30 years or greater on a fixed term), borrowers like the flexibility of having a low monthly payment. HELs offer a more reasonable interest rate (7.87% national average) than a comparable unsecured personal loan (13.20% national average) and are tax deductible like HELOCs under normal circumstances.

Credit Card(s) - With nearly 75% of all consumers expected to use credit cards this holiday season, many lenders are offering zero- to low-introductory rates, extended warranties, rebates, or points programs to attract customers. For a small fee, you can access just the amount you need to finance your purchase and schedule your monthly payments to coincide with your low introductory APR.

So before you purchase that $100,000 backyard water park from this year's Neiman Marcus Christmas Book for the kids, or spend $2,000 on a high-definition TV, consider setting a realistic budget with a specific repayment schedule in mind. It's easy to get caught up in the shopping hype when you can't afford to. Finding less expensive ways to borrow money can help ease your financial burden over the holidays while getting you the most for your money in return.

Source: Informa Research Services

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