For many, the holiday season is the most wonderful time of the year. People gather with their loved ones to enjoy a special home-cooked meal and exchange gifts around the dazzling evergreen tree. Unfortunately, if proper budgeting didn’t occur during the first several months of the year, the holiday season may seem like a financial burden.
According to Deloitte’s annual holiday survey, the average American consumer is expected to spend nearly $1,500 on holiday expenses. While the majority of holiday spending may seem like necessities, it’s important to keep your holiday spending with your budget.
Around this time, you may start noticing lenders advertising holiday loans to help lessen the financial burden of the holiday season. If you haven’t saved enough money or haven’t been able to save in general, those types of loans may seem enticing. However, there is generally more than what meets the eye regarding Christmas loans. Keep reading to discover if taking out a loan makes the most financial sense. And we’ll discuss some of the other options available to help finance your holiday expenses.
What Is A Holiday Loan?
You may encounter a couple of different types of holiday loans when the calendar flips over to November. The main type of holiday loan or Christmas loan you may come across is considered a personal loan. Personal loans are generally issued by financial institutions such as credit unions, banks and online lenders. Christmas loans are designed for individuals who need (or want) extra cash to help finance holiday expenses.
Similar to other personal loans, a holiday loan can be a secured or unsecured loan. Additionally, these loans are usually available at a lower dollar amount of $500 – $1,500. Your eligibility, terms, rates and overall loan size may depend on a few factors, such as your credit score and your annual income.
Another type of Christmas loan you may encounter very well could be a payday loan. The lenders of this type of loan generally don’t require a credit check, and they promise to send you money within 24 hours.
While fast cash seems appealing, once you peel back the curtain, that’s where you see the real issue behind payday loans. The interest rate will be in the triple digits (generally around 400%), and you only have a few weeks or months to pay the money borrowed with interest back.
Individuals may consider a holiday loan for several reasons, but some of the most common holiday expenses include gifts, travel to see family and friends, decorations and experiences.
If you’re strongly considering a holiday loan, make sure it’s a personal loan for Christmas and not a payday loan in a festive disguise.
How Do Holiday Loans Work?
Your eligibility, terms and rates may vary significantly depending on which financial institution you choose. Lenders will generally require a good credit score to qualify for a holiday loan.
Here’s an example of how the You-Name-It Personal Loan from Arizona Central Credit Union would work.
Borrowers can take out a loan ranging from $500 to $15,000. The interest rate would be as low as 7.99%—which is four times cheaper than the average credit card rate1. No application or processing fees are associated. Additionally, borrowers may expect to make fixed monthly payments over 12 to 36 months.
For example, if you took out $1,000 for a holiday loan at an interest rate of 7.99%, it would take 12 monthly payments of $86.98 to pay off the loan.
Things To Consider If You’re Shopping For A Holiday Loan
Here are a few things you should consider about Christmas loans before you sign your name on the dotted line.
- Interest rates: While it may depend on the loan terms and your credit score, personal loans generally have lower interest rates than most credit cards. Taking out a personal loan to finance holiday expenses may make more financial sense than charging it all to a credit card.
- Fixed monthly payments: Holiday loans are considered installment loans. Monthly payments span over a specific amount of time. This may allow borrowers to implement into their budget easily.
- Prequalification: Lenders may allow prospective borrowers to prequalify for a loan by pulling a soft credit inquiry. Submitting prequalification letters may allow you to shorten the list of lenders.
What Are The Drawbacks Of Holiday Loans?
A holiday loan may make the most financial sense for your current situation. However, similar to other types of debt, there is always a possible financial risk. Here are some of the disadvantages you should be aware of before shopping around for a Christmas loan.
- Increasing debt: If you already have a hard time paying off debts you currently owe, adding a holiday loan may worsen your financial situation.
- Effect on credit: While adding to and diversifying your credit portfolio is not a bad thing, any late payments or defaulting on the loan can negatively affect your credit score. Budget accordingly so you know how much to pay per month.
- Fees: Certain lenders may add fees such as origination fees or prepayment penalty fees. The loan amount may seem doable, but additional fees can add up.
Alternative Holiday Financing Options
During the first half of the year, proper planning and budgeting is the most effective way to pay for holiday expenses and avoid financial hardship. Unfortunately, that is not always possible when everyday necessities may cut into your budget. If a holiday loan is not an avenue you wish to pursue, other financing options are available. Here are some alternative ways to fund your holiday shopping spree.
Low or no interest credit card
When used properly, a credit card to fund holiday expenses may be a good option. However, this would require you to shop around for a card with a low or no interest rate. Currently, the average APR for credit cards is higher than the average interest rate on personal loans. Consider applying for a credit card that offers a 0% APR on purchases during the introductory period. Some lenders may allow an introductory period between 12 and 21 months where interest won’t be applied. Funding your holiday expenses through this strategy will allow you enough time to repay the balance without any additional interest.
While using a credit card with a low or no interest rate can get you through the holiday season, borrowing money without a proper repayment plan may put you in a deeper financial hole.
A personal line of credit
Another alternative strategy to fund your holiday expenses is through a personal line of credit (PLOC). A personal line of credit is a revolving account of credit that allows borrowers to fund up to a certain amount.
A personal line of credit is similar to a credit card, but the funds do not have to be repaid in a single lump sum. One of the biggest advantages to a PLOC is you are approved for a certain amount but only pay interest on the amount used.
Although the interest rate on personal lines of credit is variable, according to ValuePenguin, the interest rate on a PLOC can range between 9% and 17%. Additionally, it’s possible to find lenders with a lower interest rate.
Cash advances
A cash advance is another avenue worth considering to fund holiday expenses. Cash advances allow you to use your available credit on your credit card to take out a loan essentially. While this may seem like a simple process, lenders have stipulations, and they don’t treat them as a typical transaction.
Generally, credit card companies charge a fee to conduct a cash advance. While the fees may fluctuate depending on the company, cash advance fees are typically between 3% and 5%. Additionally, they may charge you a higher APR for cash advances rather than a regular purchase.
It’s important to understand the terms of the cards’ cash advances policy. This strategy may cost you more than just charging expenses to your card.
Cross Holiday Financing Off Your List
The holidays are meant to be a joyous time of the year where you spend quality time with your loved ones. If you were unable to budget for holiday expenses earlier in the year, don’t worry, Arizona Central Credit Union is here to help you navigate the financial stress of the holiday season.
If you consider a holiday loan, the You-Name-It Personal Loan provided by Arizona Central Credit Union is a great way to fund your holiday expenses. With favorable rates and terms, you can spend this holiday season worry-free. For more information, contact our loan specialists at (602) 264-6421 or apply today through our online portal.
1. 25.99% APR credit rate is the average credit card rate nationally stated on the following website: https://www.creditkarma.com/credit-cards/i/average-apr-on-credit-card/
