Christmas loans: A holiday must-have or financial lump of coal?

Young couple celebrating Christmas at home. They are sitting on floor and shopping online.Image: Young couple celebrating Christmas at home. They are sitting on floor and shopping online.

In a Nutshell

If extra expenses during the holiday season have you feeling more bah humbug than merry, a Christmas loan may sound like just the gift for you. But before you buy your way into debt with a loan for holiday spending, it’s important to understand the risks involved.
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From Christmas parties to special presents under the tree, the holidays can come with a lot of financial pressure.

Nearly 80% of Americans stress out about overspending for Christmas or the holidays, according to a 2018 Credit Karma survey — and there are lenders that market loans for the holidays specifically for that spending.

But a holiday loan is often just another form of an emergency personal loan, which can come with a hefty price tag.

If you haven’t saved — or haven’t been able to save — for the holiday spending you want to do,  and you’re thinking about taking out a Christmas loan, here are some important things to consider, and some other options to look at.

Christmas loans by any other name

As you explore your holiday options, you may come across lenders specifically advertising “Christmas loans.” What they’re actually offering is a personal loan designed for people who need (or just want) some extra money around the holidays.

Just like other types of personal loans, a Christmas loan or holiday loan can be a secured or unsecured loan. Your terms and eligibility are determined by a variety of factors that vary by lender, including your credit and income. To qualify for the most-favorable terms and most-competitive interest rates, you need to have good credit.

If you have some issues with your credit history, it may be easier to qualify for a secured loan, which would require some form of collateral. Take note though: If you’re unable to repay your secured loan and default, the lender can repossess your collateral as payment.

What to consider if you’re shopping for a Christmas loan

If you’re set on borrowing for the holidays, here are a few things to consider.

  • Prequalification Some lenders let you prequalify for a loan by pulling a soft credit inquiry, which won’t affect your credit scores. Submitting several prequalification applications can help you narrow down your list of lenders.
  • Monthly payments and a fixed timeline Christmas loans are installment loans. That means they’ll have monthly payments due over a specific amount of time — making it easier to plan into your budget.
  • Interest rates Depending on loan terms and how your credit looks, personal loans tend to have lower interest rates than credit card interest rates. So taking out a personal loan may save you interest as opposed to charging all of your holiday purchases.
  • Fast funding if approved If you choose an online lender, generally the application and funding process is quick and easy. If you’re approved, you might even receive your loan the same business day, giving you more time to prep for the holidays.

Downsides to consider about Christmas loans

As with most forms of credit, both you and your lender face some risks. Here are a few of the disadvantages to sort out before applying.

  • Fees Some lenders charge an origination fee or a prepayment penalty. These additional fees can add up.
  • Impact on credit — If you make a late payment or default on your loan, it can negatively affect your credit scores. Pay close attention to the estimated repayment amount so that you know you can afford the payments.
  • Your financial situation could get worse — If you can’t repay your Christmas loan because of high interest rates or short repayment terms, you could end up making your financial situation worse.

Pro tip: When shopping for a Christmas loan or holiday loan, be sure to compare the fees, interest rate ranges, loan amounts, monthly payments and borrower requirements for different lenders. Comparing lenders and different kinds of loans will help you find the best loan options available for you.

Keep reading: Six things you should know about personal loans

Buyer beware: Payday loans

If you’re looking to borrow $500 or less, make sure to read the loan terms carefully — your Christmas loan may actually be a payday loan.

A payday loan is a small short-term loan. What you borrow is generally due on your next payday, along with fees. While payday loans may help bridge the gap until your next payday, they come with fees that equate to extremely high interest rates.

Payday lenders may charge about $15 per $100, depending on specific state laws. That roughly equates to a 400% APR for a two-week loan, according to the Consumer Financial Protection Bureau. Because of the very high cost, payday loans should really only be considered if you’re dealing with an unavoidable financial emergency, and you should still weigh all other options before taking on a payday loan.

If you’re looking to finance holiday expenses, you should probably steer clear of any Christmas loans that turn out to be payday loans.

More holiday options

Planning ahead for the holidays and budgeting for your expenses is the best way to enjoy the season while avoiding a holiday financial hangover. But that’s not always possible — life happens, and sometimes basic necessities cut into our holiday budgets.

If you’re looking for some extra holiday funds but a Christmas loan isn’t for you, you may have some other financing options. Here are a few.

Credit cards

When used strategically, a credit card may be worth considering. If you have a cash back credit card, you may be able to leverage points or special financing for holiday expenses.

You can also consider applying for a credit card that offers an intro 0% APR for your purchases. You may be able to find an intro period between 12 and 21 months during which interest won’t accrue on your purchases.

This may give you enough time to repay your holiday expenses without interest adding up. Just make sure that you can pay off any credit card debt before your introductory rate period expires. It’s a good idea to only buy what you can comfortably afford to pay back during this period, even if you have a generous credit limit.

A word of caution: Many credit cards come with steep interest rates. If you choose to put all of your holiday expenses on a credit card with a high interest rate, you could end up paying a considerable amount of interest on your holiday extravaganza.

Unless you’ve got a plan for paying off what you borrow, financing your holiday fun with a credit card can become troublesome if you can’t afford to pay off your purchases.

Cash advances

With a cash advance, you’re essentially using your available credit on your card to take out a loan. While a cash advance may be a quick and easy way to get fast funds, credit card companies don’t treat them the same way as they would a normal transaction.

Credit card companies typically charge a cash advance fee (often between 3% and 5%, with minimums of $5 to $10) and a different APR for the distributed cash amount (often higher than the APR for regular purchases).

So before you get some holiday dough out of the ATM, make sure you understand how much a cash advance will end up costing you. If you can do so, you should consider charging the expense on your credit card instead.  

Friends or family loans

Borrowing from your friends or family can also be an option. Family loans are often less formal than personal loans from traditional lenders or peer-to-peer lending — which directly connects borrowers with potential investors. And a family loan can be a great option if borrowers have less than ideal credit and want the opportunity to receive better-than-average terms.

Keep in mind, a family loan is still a loan. It’s wise to have a contract in place to agree on repayment terms and be aware that your family member or friend may have to pay income tax on any interest you pay. So before asking, consider the impact it could have on your relationship and how taxes play a role in the transaction. 

How to create a debt-free holiday

Christmas loans and other financing options are one way to go, but, again, budgeting and setting money aside remains the best option. By making a spending plan and sticking to it, you can ease your holiday stress and avoid grinch-like behavior. Here are a few suggestions.

  • Create and manage a realistic budget. A holiday budget should include your regular expenses as well as your extra holiday expenses. This will help you determine how much you have to spend without going into debt. Also, make sure to create a list of items you need to purchase, so that you won’t be tempted to make impulse buys.
  • Become a savvy shopper. From online and in-store sales to using a cash-only spending method, there are plenty of ways you can avoid the temptation of spending more than you originally planned.
  • Get creative with gifts. Some of the most meaningful gifts are not always the ones you find in a store. Get creative and find different ways to give that won’t break the bank.

What’s next?

While a Christmas loan may allow you to spoil your family, it’s financially healthier to budget and set money aside for holiday expenses if you can. Start today by stashing some holiday cash in a designated savings account. You may even enjoy the holidays a lot more knowing that you can ring in the new year without added debt.

But if you decide to take out a Christmas loan, make sure you understand all the costs involved and create a solid plan for how you’ll repay the debt.

About the author: Ashley Chorpenning is a personal finance writer and content creator. In addition to being a contributing writer at Credit Karma, she writes for solo entrepreneurs and Fortune 500 compani… Read more.