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Are holiday loans a good idea? Here are some options.

Yahoo Personal Finance· Getty Images
Ivana Pino
·Senior Writer
Updated 7 min read

The holiday season is in full swing, which means you probably have gift-giving on the brain. While you may enjoy showering loved ones with thoughtful gifts, doing so can take a toll on your wallet — especially if you haven’t budgeted for those purchases in advance.

Luckily, there are financing options available for all kinds of holiday-related expenses. A popular option around this time of the year is the holiday loan.

A holiday loan is a type of personal loan you can use to pay for holiday expenses, like gifts and travel, though you can use the funds for pretty much anything you’d like. They typically have a fixed interest rate and repayment period. Some banks, credit unions, and other lenders may call these "Christmas loans" and offer shorter loan terms to pay off the debt before the next holiday season.

Most holiday loans are unsecured and don’t require collateral to back the loan. That means banks, credit unions, and other lenders depend on other factors — like your credit history and debt-to-income ratio — to approve or deny your holiday financing application. The amount you can borrow and other loan terms will also depend on your creditworthiness.

While bad credit may make qualifying for a holiday loan harder, it’s not quite a deal breaker. In fact, many banks and credit unions are OK with a poor credit score if other parts of your loan application are strong. For example, a high income and low debt could make up for a poor credit history.

Holiday loans are a mixed bag of perks and drawbacks. Before you apply for a personal loan this holiday season, consider the following:

Pros

  • Personal loans usually offer fast funding. Many lenders will disburse your money within days of being approved for a personal loan. Several online lenders may even fund your loan the next business day.

  • Personal loans often offer a fixed rate and lower interest rates than other financing options like credit cards.

  • Many lenders offer a wide range of repayment periods and loan terms, allowing borrowers to choose a repayment plan that best meets their needs.

Cons

  • Personal loans come with added costs like origination fees, late payment fees, and prepayment penalties.

  • When determining your loan amount, you could be tempted to borrow more than you can feasibly afford to repay.

  • Using a personal loan to cover your holiday expenses is a short-term solution and won’t cover you next year.

If you’re unsure whether a holiday loan is the right move for you, there are other ways to help pay for travel costs, Christmas gifts, and other seasonal expenses.

Ideally, you’d avoid using the savings you’ve allocated for emergencies. However, if you have extra funds available in your savings account, it could be more cost-effective in the long run to take advantage of those savings rather than paying to borrow money.

If you’re looking to finance a one-off purchase or just a few holiday expenses, it might be a better option to look into using a buy now, pay later service. Not all retailers offer this as an option, but if you’re shopping with one that does, you can spread out the cost of those purchases over time. With buy now, pay later, you’d finance your purchase and repay that amount (plus interest) in a set number of installments. Typically, the first installment is due at the time of your purchase.

If you already own a credit card, you could use it to fund your holiday spending — you will, however, want to be wary of adding to your credit card debt if you can’t comfortably afford to make your minimum payments. If you don’t already have a credit card, several credit card companies offer 0% interest-free periods that allow you to finance your purchases without paying interest for a certain period.

If you own a rewards credit card, it can’t hurt to check your cashback balance or your points and miles to determine if you can redeem any of those rewards to help you reduce your holiday costs. Many credit card companies allow you to redeem rewards for travel, gift cards, a statement credit, or even a check or direct deposit into your bank account.

A personal line of credit allows you to borrow up to a predetermined limit from your lender. While credit cards are physical cards you can use to access your money, a line of credit can be accessed via check, bank transfer, or in-person withdrawals.

When borrowing any type of loan, you want to be extra diligent as you research your loan options. There are lenders out there that take part in predatory lending practices (additional fees, higher rates, etc.) to make extra money at the consumer’s expense.

Warning signs to be aware of that could signal a predatory lender:

  • Your potential lender is using aggressive sales tactics: A predatory lender will go to any lengths to secure a new borrower. As such, a tell-tale sign of a predatory lender could be aggressiveness or persistence in their approach. This could involve being solicited via mail, telephone, or even a knock at your door.

  • There is a lack of clarity around the total cost of your loan: If your lender isn’t clear about the APR or fees associated with your loan, you should see this as a red flag. Lenders are required to provide consumers with key information about their loan products so that they can make the best decision for their financial situation.

  • Loan terms that seem too good to be true: If it seems too good to be true, it just might be. Be on the lookout for loans with shorter terms that could have higher-than-normal APRs. Payday loans, for example, are a popular financing option for smaller purchases and generally offer a speedy approval. The catch: a typical payday loan carries an annual percentage rate (APR) of almost 400%.

Ultimately, borrowing money to cover your holiday shopping comes with added costs. It will mean that you’ll have to budget for monthly payments and interest long after the holidays. It could also make it more difficult to secure financing for other expenses in the future.

If you hope to avoid taking on new debt for future holiday costs, consider doing some pre-planning for next year.

Saving for the next holiday season starts with knowing how much you intend to spend. Take some time to make a list of your regular holiday expenses and determine how much you’ll need to put away each month to hit your savings goal.

Where you put your savings is just as important as how much you’re saving. For example, putting your holiday savings in a high-yield savings account or certificate of deposit (CD) can help you earn interest on your balance with no extra effort.

In the end, every little bit you can save ahead of time for the holidays will ease the financial burden down the line. Boosting your savings by eliminating unnecessary spending or picking up a side gig to earn some extra money will make all the difference come next year.

By making the right money moves now, you can improve your financial situation and set yourself up to thrive next holiday season without the extra cost of a loan.