If holiday spending fills you with more anxiety than cheer, you’re not alone. Nearly 80% of Americans stress out about overspending for Christmas or the holidays, according to a 2018 Ddomiscum survey. In 2020, another Ddomiscum survey found that over half of Americans felt more financially stressed by this time of year than the year before. And as we near December 2021 more than 30% of people polled in our survey feel financially unprepared for this upcoming holiday season — with the impacts of the coronavirus pandemic a likely factor: Christmas loans
Some traditional lenders market loans for the holidays specifically in anticipation of increased holiday spending on things like Christmas presents or good food for a family dinner. But it’s important to keep in mind that a holiday loan is often just like a kind of emergency personal loan, which can come with a hefty price tag in the form of high fees and APR.
If you don’t have the savings you need for the holiday spending or celebrating you want to do and you’re thinking about taking out a Christmas loan, here are some of the important costs and risks to consider. We’ve also compiled some options that might help you hit your holiday goals without going the Christmas loan route.
What are Christmas loans?
As you explore your holiday options, you may come across lenders specifically advertising “Christmas loans.” What they’re actually offering is a personal loan designed for people who need (or just want) some extra money around Christmas or other winter holidays.
Just like other types of personal loans, a Christmas loan or holiday loan can be a secured or unsecured loan. Your terms and eligibility are determined by a variety of factors that vary by lender, including your credit and income. To qualify for the most-favorable terms and most-competitive interest rates, you need to have good credit.
If you have some issues with your credit history, it may be easier to qualify for a secured loan, which would require some form of collateral. Take note though: If you’re unable to repay your secured loan and default, the lender can repossess your collateral as payment.
Downsides to consider about Christmas loans
As with most forms of credit, both you and your lender face some risks. Here are a few of the disadvantages to sort out before applying.
- Fees — Some lenders charge an origination fee or a prepayment penalty. These additional fees can add up.
- Impact on credit — If you make a late payment or default on your loan, it can negatively affect your credit scores. Pay close attention to the estimated repayment amount so that you know you can afford the payments.
- Your financial situation could get worse — If you can’t repay your Christmas loan because of high interest rates or short repayment terms, you could end up making your financial situation worse.
- Same as a payday loan? — Carefully check the terms of the loan you’re considering, especially if you’re looking to borrow $500 or less. The offer may actually be just like a payday loan, which can come with costs equivalent to a 400% APR. Given how much it could end up hurting financially, it’s the type of loan that’s best not to consider unless you’re facing a true emergency with no other options.
Pro tip: When shopping for a Christmas loan or holiday loan, always be sure to compare the fees, interest rate ranges, loan amounts, monthly payments and borrower requirements for different lenders. Comparing lenders and different kinds of loans will help you find the best loan options available for you.
What to consider if you’re shopping for a Christmas loan
We’ve pulled together some possible alternatives to a Christmas loan in the following section — so be sure to check those out. But if you’re still thinking a Christmas loan might be your best option, here are a few things to consider.
- Prequalification — Some lenders let you prequalify for a loan by pulling a soft credit inquiry, which won’t affect your credit scores. Submitting several prequalification applications can help you narrow down your list of lenders and compare offers.
- Monthly payments and a fixed timeline — Christmas loans are installment loans. That means they’ll have monthly payments due over a specific amount of time. You’ll want to plan for this in your budget and be sure you can afford the payments.
- Interest rates — Depending on loan terms and how your credit looks, personal loans tend to have lower interest rates than credit card interest rates. Check the terms and math carefully to see if taking out a personal loan may save you more than a credit card would.
- Fast funding if approved — If you choose an online lender, generally the application and funding process is quick and easy. If you’re approved, you might even receive your loan the same business day, giving you more time to prep for the holidays.
Other holiday financing options
Ideally, planning ahead and budgeting for your holiday expenses is the best way to enjoy the season while avoiding a post-holiday financial hangover. But we know that’s often not realistic or possible — sometimes basic necessities cut into our holiday budgets.
But there may be options for you that are less risky and costly than a Christmas loan. Here are a few possibilities.
Buy-now, pay-later apps
A number of newer apps have surfaced in recent years that offer to make buying now and paying later easier than ever. Typically, a buy-now, pay-later app lets you make purchases by paying a fraction of the total upfront and paying off the rest in installments — often with no interest as long as the payments are made on time. If this sounds good to you, check this roundup of the 5 best ‘buy-now, pay-later’ apps we compiled to help you learn more.
As with any form of lending, always check the terms of an app carefully to see if there are any fees, interest or other charges to be aware of.
When used strategically, a credit card may be worth considering. If you have a cash back credit card, you may be able to leverage points or special financing for holiday expenses.
You can also consider applying for a credit card that offers an intro 0% APR for your purchases. If you can get one with an intro period between 12 and 21 months during which interest won’t accrue on your purchases, that may give you enough time to repay your holiday expenses without interest adding to the cost. You’d just have to pay off your balance before the introductory period expires.
Remember that it’s a good idea to only buy what you can comfortably afford to pay back during an no-interest intro period, no matter how big your credit limit might be.
With a cash advance, you’re essentially using your available credit on your card to take out a loan for cash in hand. Credit card companies typically charge a cash advance fee (often between 3% and 5%, with minimums of $5 to $10) and a different APR for the distributed cash amount (often higher than the APR for regular purchases). With that higher cost in mind, unless you really need or want actual cash, you should consider another option.
If you’re looking to up your spending for the holidays, consider the pros and cons of all your options. Taking out a Christmas loan could come with costs that set you back far beyond the new year if you don’t have a solid plan for how you’ll repay the debt — and using a credit card may or may not be a better option.
Buy-now, pay-later apps are a potentially sound alternative but also require you to budget ahead to ensure you can handle paying for purchases in a small number of installments.
Creating a realistic holiday budget can be great a way to view your regular expenses and holiday expenses in one place and track your spending. Consider reading our guide for even more tips to help you manage your holiday debt, including creative gift-giving ideas.