When it comes to budgeting for the holidays, it isn’t as simple as making a list and checking it twice.
The holiday season often brings some of the year’s biggest expenses, stretching many shoppers’ budgets to the limit.
In fact, the holidays will add an extra $935.59 to the typical shopper’s budget this year, according to National Retail Federation (NRF) projections.
Skip the credit card when budgeting for the holidays
But many shoppers won’t have that much cash in savings to cover holiday costs. Or, they can’t find extra money in their budgets to cover gift purchases for the last two months of the year.
Ultimately, these shoppers will probably have to go into debt for the holidays. And many will automatically turn to credit cards to cover the cost.
What’s more, credit card companies know that this is a prime time to get more customers and new revenue.
“You may be bombarded with credit cards offers from banks and department stores during the holiday season,” says Todd Lunsford, CEO of online loan provider RocketLoans.
But credit cards can be a costly way to fund holiday expenses.
Shoppers who go into debt to pay for the holidays add an average $986 to their balances, according to a survey from MagnifyMoney last year. Although that’s not a huge balance, even that amount would take 10 years to pay off at credit card minimums.
With repayments, holiday shopping often becomes 40 percent more expensive thanks to interest. And that’s assuming average credit card rates are around 15.00% APR.
If shoppers are charging to cards with higher interest rates above 20.00% APR, the costs will add up even faster.
Using a personal loan to fund holiday expenses
Alternatively, a personal loan can be a smart way to handle budgeting for the holidays when you’re short on cash.
If you know you’ll have to take on debt to cover this year’s holiday costs, start looking for a personal loan now.
“Planning your finances ahead of time can help you stay on track and avoid high-interest rates in the future,” Lunsford says. Additionally, it could take a little time to find the right lender and get your personal loan approved and paid to you.
A personal loan offers several holiday budgeting advantages over credit cards. The biggest is the cost. A personal loan can save you a lot of money through lower interest rates and a structured repayment plan.
And, a typical personal loan interest rate is around 10.00% APR, which is half the higher credit card rates and a third lower than average credit card rates.
On top of that, having a set repayment plan can keep your holiday debts from dragging out, which also saves you money on interest.
“You don’t want to be paying for this year’s holiday for the next three to five years,” Lunsford adds.
What to watch out for with a holiday loan
“While taking out a personal loan can help with your holiday shopping, it should be used cautiously,” Lunsford advises. There are some drawbacks to personal loans that could make them a less-ideal option for your holiday budget.
For instance, you might run into issues if the amount you need to borrow for the holidays is relatively small. Many personal loan providers have a minimum loan amount, which is typically around $3,000. That’s quite a bit more than most people plan to spend.
If that’s your situation, it might take longer to find the right lender (if you can at all). Try checking with alternative financiers, like online lenders or credit unions. They might be more likely to provide smaller personal loans.
Make sure you also keep an eye on the fees for your personal loan. Some lenders charge origination fees to take out a loan. This can add to the costs of your holiday debt, and lower what you can actually expect to save.
Additionally, consider other borrowing options along with holiday loans. You could charge your purchases and consolidate holiday debt with other credit card balances.
“Consolidating your credit card debt into one fixed monthly payment can help with planning your 2017 budget,” Lunsford says.
Plus, many credit cards will be offering 0% introductory rates and signing bonuses for the holiday season. If you can qualify for these credit cards, they might offer a better deal than a holiday loan.
Holiday budgeting tips to keep debts low
Once you’ve picked the best credit option for your needs, you can employ some smart money strategies to cut costs. These holiday budgeting tips can help you keep your spending and debt under control.
Borrow as little as possible
If you have to borrow for the holidays, make sure you’re cutting your spending back to the bare minimum.
“Plan ahead for your holiday shopping,” Lunsford suggests. That way you’ll know what you’ll need to pay and can identify expenses to cut to save up for holiday purchases.
For example, maybe this year isn’t the year to fly somewhere for the holidays, and you can save on airfare. And, take a look at your gift list to see if there’s anything to cut back on as well.
Set (and stick to) a holiday budget
“Set your budget and stick to it,” Lunsford says — something 59 percent of shoppers do, according to a survey from Synchrony Financial.
The temptation to overspend is real. The NRF survey also reveals that 87 percent of shoppers can be convinced to spend an extra $25 with the right deal.
However, “Going into the store with a plan and budget will prevent any spontaneous spending and therefore, spontaneous debt,” Lunsford explains.
Repay debts as fast as possible
Make sure you’re also planning ahead to ensure your pay your debts back.
In fact, the sooner the better — and the higher the savings. Set up a budget for the new year to put extra money toward this debt.
And, “If at any time in the upcoming months you find yourself with extra cash, put it toward paying down your principal,” Lunsford says. “Most personal loan companies won’t charge fees for early repayment.”
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