The National Retail Federation (NRF) predicts that retail sales will increase during the holiday season 6 to 8 percent in 2023 – and up to 12 percent for online sales. But while giving gifts can be a great way to show you care, buying them can be expensive.
Holiday loans can be a tempting way to cover gaps in your budget, but they can add to your overall financial problems. While there may be limited circumstances in which they are useful, you should fully explore holiday loan alternatives first.
Should I get a holiday loan?
What holiday loans are
A holiday loan is one type of personal loan intended for seasonal expenditure. Just like any other personal loan, holiday loans allow you to borrow money quickly and easily without having to put up collateral.
However, holiday loans are not exactly the same as other types of personal loans. One of them is that they are only available during the holidays. You cannot take out a holiday loan in mid-May. Holiday loans also tend to have lower limits than other personal loans. Typically, credit unions and banks offer holiday loans ranging from $500 to $2,500, with some willing to lend as much as $5,000.
Most holiday loans also have shorter repayment terms. You only have a few months to a year to repay a holiday loan, while other personal loans give you years to repay your debts.
What can you use a holiday loan for?
Holiday loans are not just for giving gifts. Any short-term expenses during the November and December season can be covered.
- Buy gifts. If you don’t have enough money set aside to buy a gift for everyone on your list, a holiday loan can help.
- Trip. Holiday loans can offer greater coverage travel expenses for things like plane tickets, hotels or gasoline.
- Other expenses. Most lenders don’t place restrictions on how you use the money. As with less specialized personal loans, you can use the money you get from a holiday loan for almost anything.
Should I use a holiday loan to pay excessive travel prices?
According to Bankrate’s 2023 Leisure Travel Survey, 77 percent of leisure travelers have reported changing some aspect of their plans due to inflation or high travel prices.
If you’re like most Americans and have had to change some of your travel plans due to inflation, it may seem tempting to use a loan to finance vacation trip prices. However, that’s probably not the best route when it comes to your future financial health. Loan interest rates currently average 11.54 percent, meaning you could pay off your vacation trip for years to come.
Getting home (or on vacation) for the holidays may be non-negotiable, but that doesn’t mean you need to take out a loan to cope with the high prices. Consider the alternatives, such as financing through a travel company, using a third-party discount travel service, or driving to your destination. You can also borrow the money from a family member or friend and pay back the balance in monthly installments to avoid interest charges.
Factors to consider when obtaining a holiday loan
You should always check the lender’s rates, fees and repayment terms before applying.
Interest
The interest are the costs of borrowing. The higher the rate, the more you pay. The lower the rate, the less you pay.
Personal loans – including holiday loans – usually have a lower interest rate than regular loans credit cards. The better your credit score, the more likely you are to qualify for a competitive APR from a top lender.
However, every lender determines its rates differently. And even if you qualify for low rates with a vacation loan, there are some credit cards with 0 percent APR purchase periods that could result in you paying less overall.
Cost
In addition to interest, lenders charge costs when you borrow. Setup fees are the most common, but there are also late fees and prepayment penalties to consider.
- Origination fee. The origination fee is a percentage of the total amount you borrow and is added to your balance when the loan is funded. For example, if you borrow $1,000 with a 3 percent origination fee, your loan balance will start at $1,030 even though you only received $1,000.
- Late fee. You will only be charged a late fee if you do not make the scheduled payment. However, they can be a major added expense if you are not careful. Sign up for autopay or set a reminder on your calendar to stay on track.
- Fine for prepayment. You will be charged a prepayment penalty if you make extra payments or pay off your loan early. These are rare on personal loans, so check if your lender charges one.
Refund period
The term of a loan is the time it takes to repay the loan if you follow the minimum payment schedule. Most holiday loans have a term of six to twelve months.
The time it takes to repay your loan affects the total cost. Even if two loans have the same interest rate, more interest will accrue the longer it takes to pay off the loan. This means that long-term loans are more expensive than short-term loans. You have to use one personal loan calculator to estimate potential payments based on your interest rate and loan term.
Alternatives to holiday loans
Holiday loans can be risky because you’re borrowing money to buy things you don’t really need. If you can’t afford to travel or buy gifts, borrowing money can put you in a precarious financial position.
Start saving early
While it’s probably too late to do this during the holidays, automatic savings plans are a great way to ensure you have some money left over for the holidays.
“Pay yourself first and make it automatic,” says Chicago-based certified financial planner Henry Gorecki. “Set up an automatic transfer with your bank of $100 per month from your checking to a savings account called Holidays 2023 or something similar.” You can adjust the amount according to your needs.
Making the transfers automatic is essential, Gorecki says. “If you have to log in every month and transfer the money, that’s probably not going to happen.”
Give homemade gifts
Giving someone a homemade gift is a great way to show that you care about them without having to spend a lot of money. Best of all, you can play to your strengths. If you are good at baking, bake your friends’ favorite dessert for them. If you are an artist, you can create a painting to decorate a relative’s house. If you like knitting, you can make new hats or sweaters for people on your gift list.
Give gifts of time or talent
Another way to give without spending a lot of money is to offer your time or talents to a loved one. Reserve a day to spend together or meet up for a special meal or event.
You can also offer to help your loved ones with a project. If you’re handy, offer to help with a home improvement project. If a family member is moving, let him or her know you will be there to help carry boxes.
You don’t always have to give material goods to show your loved ones you care during the holidays. Spending your time is a great alternative.
it comes down to
A holiday loan is a way to stretch your gift-buying budget. However, borrowing money when you can’t afford to give gifts is not a sound financial decision. Few true friends want you to go into debt to give them a Christmas present. You’ll probably be better off finding other ways to show that you care.
If you decide a vacation loan is the right choice, consider a general loan personal loan also. It needs similar documents, and many lenders have a quick application process. Plus, you can get a longer loan term, which gives you lower monthly payments so you can spread the costs.
