Should You Get A Holiday Loan? – Forbes Advisor

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Pandemic or not, families are still looking to celebrate the holidays with food and gifts. Last year, Americans spent more than $730 billion on holiday-related purchases, according to the National Retail Federation.

This year, holiday shopping isn’t expected to hurt. In fact, retail sales are expected to rise by at least 1{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} in 2020, according to the consulting firm Deloitte. Still, millions of Americans have filed for unemployment, faced reduced hours or been furloughed. But these families are still looking for ways to make the holidays special. And they might look into holiday loans to do it.

What Is a Holiday Loan?

A holiday loan is a type of unsecured personal loan that you can use toward holiday-related purchases, like gifts for friends and family. You also could use these funds to pay for other holiday expenses, like food and travel, or for covering other costs in case you can’t work during this time.

You also can use a credit card or personal line of credit as a type of holiday loan, but interest rates on these products tend to be higher than with unsecured personal holiday loans.

How Holiday Loans Work

Unsecured loans, like many personal loans, are installment loans you can take out and make payments on for a set amount of time until they’re repaid in full. Holiday loans, in particular, are offered by many banks, credit unions and online lenders, but are typically only available during the last couple months of the year.

Holiday loan amounts and interest rates will vary by the institution, but are usually low-dollar amounts, upwards of $1,500 or $2,500. However, some lenders may offer loans as high as $5,000, depending on your needs and eligibility. Likewise, interest rates range from about 7.99{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} to 13.99{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}, but vary by lender.

Terms also vary by institution, but many are short-term loans you can repay within a year. As an added bonus, some lenders don’t charge a prepayment penalty on holiday loans, making it easier to quickly pay down debt early without incurring any additional fees.

When to Get a Holiday Loan

Holiday loans are just that: for the holidays. Many holiday loans aren’t offered year-round and instead, are available near the end of the year. For example, some lenders don’t open holiday loan offers until close to Halloween and stop offering them before the new year.

Since many people do the bulk of their holiday shopping in November, you’ll want to explore your  holiday loan options beginning in  late October or early November.

You also may want to get a holiday loan if you’ve already completed your holiday shopping and want to save on high-interest credit card debt. In this case, you’d use a holiday loan to pay off your higher interest credit card balances, leaving you with a single monthly payment on your holiday debts.

If you need a little bit of cash to cover presents and expenses during the holidays, a holiday-specific loan might work for you. Consider one if:

• You have a solid credit score. A good or excellent credit score will get you the lowest interest rate available. If you don’t have a great credit history, you may only qualify for a high interest rate, which means it’ll cost you even more to pay back the loan.
• You can repay the loan. Even if you don’t make a habit out of borrowing money, you still need to consider your ability to repay a holiday loan. Not only will a potential lender evaluate your debt-to-income ratio when reviewing your application, you should consider how an additional monthly payment will fit into your budget. If you don’t have the funds—or don’t think you will—a holiday loan may not be a great option for you.
• You want to consolidate debt. If you’ve already done your holiday shopping through credit cards and want to lower your interest payments, a holiday loan can help. In this case, shop around for a holiday loan with a lower interest rate than your existing credit cards, use the funds to pay off those cards and then repay your holiday loan.

Types of Holiday Loans

There are a few different ways to borrow money to pay for your holiday needs:

Personal Loans

Personal loans are unsecured loans that enable you to borrow money for almost anything. In the case of holiday loans, you’ll use the money to pay for holiday-related goods. If you have a good or excellent credit score and can get a low interest rate (usually between 7.99{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} and 13.99{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} for a holiday loan), this might be a cheaper option than using credit cards, which can come with rates over 20{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}.

Start by checking with your bank to see if they offer personal loans to current account holders. If holiday loans aren’t available at your bank—or if the rates are too high—credit unions also are  a great option if you need to borrow a low dollar amount.

Credit Cards

Credit cards let holiday shoppers access a revolving line of credit to cover everything from gifts to a Thanksgiving turkey. This type of holiday financing lets you spend money, up to a certain limit, and then make payments on your revolving credit line as you’re able. Credit cards typically come with higher interest rates than other types of holiday loans, making them one of the more expensive ways to fund your celebrations.

If you can afford to pay off your entire credit card balance when it’s due, you’re basically getting an interest-free loan. But if you need to make payments over the course of a few months, you’ll likely encounter interest rates higher than those available for personal loans. If you can’t get a personal loan to cover holiday expenses and already have credit cards, this might be your only option—but it could be a more costly one.

Personal Credit Line

A line of credit is similar to a credit card—it’s a revolving credit line where you can borrow up to a certain amount at any time and make payments by the due date. You also can use a personal credit line the same way you’d use a personal loan. However, instead of getting a lump-sum amount and paying it back in installments, you can take out what you need, as you need it—up to a certain amount, of course. Then, make payments on your outstanding balance while still having the option to borrow against your limit as additional expenses pile up.

What to Consider When Shopping for a Holiday Loan

When you’re comparing holiday loan options, consider these factors:

• Interest rates. Holiday loan interest rates are usually lower compared to other options like personal loans, credit cards and personal lines of credit. That said, you should compare many different options before making your choice. Interest rates on holiday loans typically range from 7.99{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} to 13.99{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} but are largely based on the borrower’s credit score, income and other factors.
• Repayment terms. Many holiday loans have 12-month repayment terms, letting you split up payments over the course of the next year. While some lenders might have longer repayment terms, this will impact your overall amount due—the longer you make payments, the more you’ll pay in interest. Even if you get a short-term loan, pay it off as soon as you can to avoid paying more in interest.
• Fees. Look out for holiday loans that charge origination fees or prepayment penalties. Likewise, does the lender charge late fees? Can you get a discount if you sign up for autopay? Even if a lender has decent interest rates, evaluate other applicable fees to see if you’ll end up paying more in the long run.
• Prequalification. Many lenders let prospective borrowers complete an initial loan application to see if they prequalify for a personal loan. This process lets lenders evaluate a borrower’s needs and general creditworthiness based on a soft credit inquiry. For that reason, prequalification lets you shop around for the best holiday loan rates without hurting your credit score. Once you find a lender that can offer you favorable terms, you’ll submit a formal application and consent to a hard credit check.

Pros and Cons of Holiday Loans

Holiday loans aren’t right for everyone but, depending on your needs, they may be beneficial.

Pros

• You can borrow what you need. Because holiday loans are usually low-dollar, you can borrow what you need and avoid paying interest on a loan that’s larger than necessary.
• Lower interest rates. Holiday loan interest rates are typically lower than those of regular unsecured personal loans.
• Short terms. Most holiday loan repayment terms are 12 months. Plus, many lenders don’t charge prepayment penalties, so you can pay off your loan early without facing extra fees.

Cons

• You’ll pay more than your actual holiday expenses. Remember that borrowing money to pay for the holidays means you’re paying for the cost of goods plus interest. If you’re using credit cards, your interest rates could be much higher compared to personal loans.
• Your credit score could suffer. If you make late payments, miss payments entirely or default on your loan, your credit score could tank and hurt your chances of borrowing money in the future.

Holiday Loan Alternatives

Instead of borrowing money with a holiday loan, consider other options, like:

• Saving early. Start saving for the holidays when the season ends. Putting a little bit of cash away each month into a savings account can help alleviate the need to borrow money when holiday shopping rolls around.
• Buying throughout the year. Rather than buying all your gifts at once, buy presents year-round when you find the best deals.
• Cash back credit cards. You can also help cover holiday expenses by using cash back credit cards. However, you should only choose this option if you can pay off your credit cards in full every month. Otherwise, your interest rates will be much higher than for personal loans.