The holidays aren’t cheap. The costs of gifts, food and decorations add up quickly. And, for some consumers, holiday bills far exceed their savings. The National Retail Federation reported that consumers planned to spend an average of about $1,000 on holiday purchases in 2018.
According to a MagnifyMoney holiday debt survey conducted in December 2018, 64% of respondents unexpectedly went into debt to finance holiday purchases. A majority of those put their debt on credit cards, while about 14% used personal loans. (Disclosure: MagnifyMoney, like Student Loan Hero, is owned by LendingTree.)
In some cases, financial institutions customize personal loans for the holiday season and call them “holiday loans.” The idea is that consumers can take out a small, short-term loan to pay for Christmas gifts and other holiday purchases.
3 things to consider before taking out a holiday loan
Before rushing to apply for a holiday loan, it’s important to think through whether it’s the best way to pay for holiday purchases. You may find that the loan will be more costly than you expect and will significantly impact your budget for the next year.
1. Do you really need a holiday loan?
Holidays can be difficult in and of themselves, and adding debt can only increase your stress. More than 60% of the MagnifyMoney survey respondents who took on holiday debt said they felt stressed about it.
So before you apply for a loan, consider whether you really need it. Could you cover the holiday costs with savings instead? Could you cut spending elsewhere during the holiday months to pay for your purchases? And if you do take out a holiday loan, could your budget absorb the monthly loan payments afterward?
2. Do you qualify for a holiday loan?
Holiday loans are essentially personal loans marketed for holiday spending, so applicants will have to meet their credit and financial history standards to get one. Some financial institutions advertise smaller loans with shorter terms for the holidays, targeting consumers who need a little extra cash during the season. In most cases, you’ll need a credit score of 600 or above to qualify for a manageable interest rate. If you credit score is lower than that, your interest rate could be as high as 199%.
Steve Reardon, director of lending at Self-Help Credit Union in Durham, N.C., said the credit union offers one-year holiday loans between $500 and $2,000 at 9.9%.
“We don’t do more than 12-month terms, so by next holiday season it’s paid off,” he said.
All holiday loans from Self-Help Credit Union have the same rate, regardless of the applicants’ qualifications, although not everyone will get approved. Reardon said your debt-to-income ratio and credit history drive approval decisions.
3. How much will your loan cost you?
Even if you get a holiday loan with short terms and a low interest rate, it will cost you. Here are some examples using Student Loan Hero’s personal loan calculator.
Loan amount: $1,000
Terms: 12 months
Interest rate: 5.5%
Monthly payment: $86
Total interest over the life of the loan: $30
Loan amount: $1,500
Terms: 12 months
Interest rate: 9.9%
Monthly payment: $132
Total interest over the life of the loan: $82
Loan amount: $2,000
Terms: 12 months
Interest rate: 11.9%
Monthly payment: $178
Total interest over the life of the loan: $131
For a small, low-interest loan, the interest accrued over the life of the loan could be negligible. But as the loan size increases, so do the payment and the interest, and borrowers will need to weigh whether their budget can handle the monthly payment and whether the loan is worth the cost of the interest.
Consumers can find holiday loans — or personal loans — at many types of financial institutions, including traditional banks, credit unions and online lenders.
3 alternatives to a holiday loan
Holiday loans aren’t always the best choice for funding holiday spending. If you qualify for one, you’ll have to pay interest, and as soon as the new year arrives, you’ll add a monthly debt payment to your budget. Here are three budget-friendly alternatives.
While these loans are designed to help people build credit, they can also help you save money in advance for holiday purchases. These loans work in reverse of typical loans as you get the money at the end of the life of the loan instead of when you sign for it.
“[Loan payments] are put into your savings account and put on hold, then you pay the loan and the money is available once the loan is paid off,” Reardon said.
Consumers needing holiday money can benefit from even a six-month credit-builder loan, Reardon said. With a monthly loan payment of $86 for a $500 loan and $172 for a $1,000 loan at 9.95% interest, consumers can repay a credit-builder loan in half a year. You’ll also earn some interest.
Some financial institutions, such as Self-Help Credit Union, have replaced Christmas Clubs with holiday loans, but you may find some lenders that still offer them. Christmas Clubs are short-term savings account, where consumers deposit a certain amount of money in the club account each month and are required to pay a fee if money is withdrawn before the holidays.
“It’s a painful product, but it does have that kind of discipline around it,” Reardon said.
The best — and most financially sound — way to pay for holiday purchases is to save money beforehand and create a holiday budget based on these savings.You can do this by opening a savings account at your bank, making it a line item in your monthly budget or even putting aside cash in an envelope. When holiday shopping season arrives, you will then have money to spend and a set limit on how much you can buy.
It’s easy to overspend during the holidays. If you approach the season with a financial plan, you won’t spend more than you can afford or enter January with additional debt.
If you do decide to take out a holiday loan, make sure that it’s financially feasible in the long term and not just easy cash to buy gifts.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.74% – 16.99%1||$5,000 - $100,000|
|7.54% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|