Christmas shopping started early this year. According to a Bankrate survey, 50 percent of consumers have already started checking items off their lists or plan to do so by Halloween. Nearly half of respondents plan to use cash, but 29 percent will finance their purchases to have more time to pay them off.
Both personal loans and credit cards can be used to pay for your holiday purchases if you are low on cash and want to take advantage of deals early, although you will pay more for the gift because of the interest. That said, both have their pros and cons that are worth considering before choosing one.
Pros and cons of using a personal loan for holiday purchases
When it comes to holiday shopping, personal loans aren’t exactly the norm. After all, they don’t offer some of the flashy benefits that credit cards do. However, they can also provide other benefits.
Plus points
- Lower interest rates. Personal loans have a much lower interest rate than credit cards – some as low as 5.20 percent. Additionally, most personal loans have a fixed interest rate, meaning they are not subject to increases due to market fluctuations.
- Controlled expenses. If you want to stay within a budget, personal loans can help you do that because they come in lump sums and are provided in a lump sum.
- Predictable payments. Because personal loans have both a fixed interest rate and a fixed repayment term, your payments remain the same over the life of the loan – something many credit cards don’t offer.
- Versatility. Lenders typically place very few restrictions on how you can use the money from a personal loan, so you can use the money for just about anything. An additional advantage is that you have the money at hand.
- Can improve your credit. Personal loans can contribute to both your credit mix and your payment history, which make up 10 percent and 35 percent of your FICO score, respectively. That means you can see an increase in your score just by making on-time payments every month.
Disadvantages
- Costs. Depending on the lender, you may be charged an origination fee of up to 10 percent of the loan amount, or a prepayment penalty may be assessed if you pay off your loan early.
- No rewards. Credit cards may give you a number of benefits, such as cash back or reward points on purchases. Personal loans do not offer this.
- Probably a higher monthly amount. With a personal loan, you’ll likely have to pay more each month, which may leave you with less breathing room in your budget when things get tight.
- Fixed amount. A fixed spending amount can be good if you have a limited budget, but it can also be limiting.
Pros and cons of using a credit card for holiday purchases
Credit cards are America’s darling when it comes to holiday shopping. According to Bankrate’s research, 53 percent of vacationers plan to use their credit card for at least one purchase.
Plus points
- Spend how you want. One of the main benefits of using credit cards, instead of a loan for your holiday expenses, is that you get the flexibility to spend whenever you want. That means you have more wiggle room in your budget.
- Potential savings. Another unique benefit of credit cards is that they give consumers access to exclusive offers, in addition to cash back or reward points on purchases.
- Flexible payment options. Credit cards allow you to pay a minimum amount each month, which represents part of your balance, plus any interest. However, you can also pay it in full every month without incurring a penalty.
- You could avoid interest. If you have excellent credit and qualify for a 0 percent introductory offer, you can avoid paying interest while the offer is in effect. Most cards also allow you to avoid paying interest by not carrying a balance.
Disadvantages
- Higher interest rates. The average credit card has an interest rate of almost 21 percent, which is quite high. This interest rate also depends on market conditions, which means it may increase. This can make it harder to get out of debt if you’re carrying a balance.
- Overspending. The flexibility of a credit card can also be its biggest disadvantage. If you don’t keep a close eye on your balance, you could get carried away and find yourself in a sticky situation by overspending.
- Can affect your credit. Credit cards can increase your credit utilization ratio. Credit utilization accounts for 30 percent of your FICO score. That means your score can drop if your balance is too high.
- Can lead to a cycle of debt. Because credit cards only require you to pay a percentage of your balance each month, it can be tempting to simply pay the minimum amount to keep more cash in your pocket. In the long run, this can cause you to rack up tons of debt, affecting your credit and your finances.
Should you use a loan or credit card for your holiday expenses?
Cash is always the best option when it comes to non-essential purchases. By using cash, you avoid growing your debt and paying more for your purchase due to interest. If you choose to finance your holiday expenses, consider which product best suits your needs.
Both personal loans and credit cards can offer unique benefits if you need a solution to finance your holiday expenses. That said, personal loans may be better suited if you have good or excellent credit and a set budget.
You’ll likely get a lower interest rate than a credit card if you have the financial resources to qualify, and you’ll protect yourself from future interest rate increases. Personal loans can also be a good idea if you’ve had trouble sticking to a budget in the past, because you only get a fixed amount and can’t overspend.
Credit cards, on the other hand, require more self-control. If you’re not in the habit of overspending or carrying a balance, credit cards can be a cheaper option than personal loans. That’s because you can avoid paying interest by paying your balance in full each month, and maximize your savings by getting cash back, rewards and more.
