Christmas loans: Should you finance your holiday gifts?

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 you’re not sure you can afford holiday spending, a Christmas loan may sound like a good idea. But before you take on debt with a loan, it’s important to understand the potential risks, like high fees and interest. Alternatives — like using a credit card or choosing from a robust field of buy-now, pay-later apps — may be better options.
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From Christmas parties to special presents under the tree, the holidays can come with a lot of financial pressure.

If holiday spending fills you with more anxiety than cheer, you’re not alone. In fact, 39% of Americans reported not being able to afford holiday gifts for the upcoming season, according to a 2022 Credit Karma survey. And 69% of Americans plan to take on debt to cover costs during the holidays, according to the survey, with respondents citing the rising cost of living and inflation as the top factors contributing to financial pressures.

Some traditional lenders market loans for the holidays specifically in anticipation of increased holiday spending on items like Christmas presents or food for a family dinner. But it’s important to keep in mind that a holiday loan can come with a hefty price tag in the form of high fees and APR.

Here are some of the important costs and risks to consider. We’ve also compiled some options that might help you hit your holiday goals without using a Christmas loan.

What are Christmas loans?

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 some extra money around Christmas or other winter 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.

Where can I borrow money for Christmas?

You may be able to borrow money from lenders, retailers and buy-now, pay-later apps. As you weigh your options, be sure to pay attention to fees and interest rates and avoid high-APR loans such as title loans and payday loans.

If you’re thinking about borrowing money for Christmas gifts, here are some options to consider.

  • Affirm This buy-now, pay-later — or BNPL — lender allows you to pay over time for online or in-store purchases by choosing Affirm at checkout or using a virtual card within the app. You can apply to prequalify through a soft credit inquiry that doesn’t affect your credit. Thousands of retailers offer payments through Affirm, and some have 0% APR offers.
  • Earnin Earnin offers online paycheck advances. This may allow you to access a maximum of $100 per day, or $500 per pay period ($250 for new members). The app gives you the option to leave a voluntary tip, but it doesn’t charge mandatory fees or interest.
  • Chime If you’re looking to stretch your holiday budget just a bit, a Chime checking account could be a good solution. When you set up direct deposit, you’ll be able to access your paycheck up to two days earlier than with some traditional bank accounts.
  • Possible Possible offers loans of up to $500 that you can access “instantly” and pay back over four installments, even if you have bad credit. Unlike many other BNPL options, this lender is not tied to any specific retailers. This could give you extra flexibility when shopping for Christmas gifts.

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.
  • Same as a payday loan? — Carefully check the terms of the loan you’re considering, especially if you’re looking to borrow $500 or less. The offer may actually be just like a payday loan, which can come with costs equivalent to a 400% APR. Given how much it could end up hurting financially, it’s the type of loan that’s best not to consider unless you’re facing a true emergency with no other options.

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

Keep reading: Six things you should know about personal loans

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

If you still think a Christmas loan might be your best option, 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 and compare offers.
  • 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. You’ll want to plan for this in your budget and be sure you can afford the payments.
  • Interest rates — Depending on loan terms and how your credit looks, personal loans tend to have lower interest rates than credit card interest rates. Check the terms and math carefully to see if taking out a personal loan may save you more than a credit card would.
  • 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.

Other holiday financing options

Ideally, planning ahead and budgeting for your holiday expenses is the best way to enjoy the season while avoiding a post-holiday financial hangover. But we know that’s often not realistic or possible — sometimes basic necessities cut into our holiday budgets.

But there may be options for you that are less risky and costly than a Christmas loan. Here are a few possibilities.

Buy-now, pay-later apps

Like Affirm, a number of newer apps have surfaced in recent years that offer to make buying now and paying later easier than ever. Typically, a buy-now, pay-later app lets you make purchases by paying a fraction of the total upfront and paying off the rest in installments — often with no interest as long as the payments are made on time.

If this sounds good to you, check out this roundup of the 5 best ‘buy-now, pay-later’ apps we compiled to help you learn more.

As with any form of lending, always check the terms of an app carefully to see if there are any fees, interest or other charges to be aware of.

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. If you can get one with an intro period between 12 and 21 months during which interest won’t accrue on your purchases, that may give you enough time to repay your holiday expenses without interest adding to the cost. You’d just have to pay off your balance before the introductory period expires.

Remember that it’s a good idea to only buy what you can comfortably afford to pay back during an no-interest intro period, no matter how big your credit limit might be.

If you think it’s worth looking into a credit card option, here’s a place to start for …

Cash advances

With a cash advance, you’re essentially using your available credit on your card to take out a loan for cash in hand. 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).

With that higher cost in mind, unless you really need or want actual cash, you should consider another option.

Next steps

Creating a realistic holiday budget can be great a way to view your regular expenses and holiday expenses in one place and track your spending. Consider reading our guide for even more tips to help you manage your holiday debt, including creative gift-giving ideas.

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 companies. Ashley has a Bachelor of Bu… Read more.