Unless you’ve been saving for months or have lots of wiggle room in your budget, you’re probably trying to figure out how the heck you’re going to pay for extra holiday expenses. If you’ve thought about taking out a small loan, there are several things you need to consider before borrowing money.
Why People Borrow for the Holidays
Gifts, travel, outings — there are plenty of reasons someone might find themselves short on cash to do everything they want during the holidays.
“These loans offer the money some consumers need to experience the holiday they dream of, but if repayment is not carefully considered then it is a fleeting benefit,” said Danielle Peck of Clearpoint Credit Counseling Solutions in Syracuse, New York.
Options like borrowing from a family member, using a credit card, taking out a payday loan or applying for a personal loan marketed as a “holiday loan” may appeal to those who haven’t saved or don’t have the money within their regular budget to spend on holiday extras, Peck said. When you’re weighing options like that, it’s important to focus not only on what that loan will give you but also what you’ll have to do in order to repay it.
“Though there are exceptions, many of these loans have high interest rates which can make them quite costly. They also tend to have a short repayment period,” Peck said. “Conversely, if a credit card it used, the repayment can be nearly indefinite when only the minimum payment is made, and interest rates can be as high as 30%!”
The Costs of Borrowing for the Holidays
Whenever you’re looking at a loan or credit card to finance something, it’s crucial to have a plan for repaying it. That means understanding the interest rate, how long you’ll have to pay it back, when the payment is due and how much money you’ll need to pay off the debt. If you don’t make a plan, you could find yourself even more cash-strapped than you were when you decided to borrow the money — that’s often what happens when people take out short-term loans. Take the time to do the math, because it’s easy to overlook just how expensive loan interest can be, and the added cost may not be worth what you’re buying with the borrowed money. You can use this free credit card payoff calculator to help you make a plan for dealing with credit card debt.
How Holiday Debt Can Affect Your Credit
Taking on debt or opening a new account can hurt your credit score, so if you know you’ll need a loan in the next several months, adding holiday debt to your credit reports may not be a good idea. While your payment history is the most important aspect of your credit scores, your level of debt is the next most influential. High debt balances, particularly credit card balances near their limits, can knock dozens of points off your credit score, so spend with care. (You can see how your loans and credit card use affects your credit by getting two free credit scores, with updates every 14 days, on Credit.com.)
For shoppers with a good credit score and the discipline to repay debt within a specific time frame, a credit card with a promotional interest rate may help you cover high end-of-year costs. For example, Citi Simplicity offers 0% annual percentage rate (APR) on purchases and balance transfers for 18 months, after which the APR switches to 15.74% - 25.74%* (Variable). There’s also Discover it, which offers six months 0% APR on purchases and 18 months 0% APR on balance transfers, with an APR of 13.74% - 24.74% Variable on purchases & balance transfers after. (Full Disclosure: Citibank and Discover advertise on Credit.com, but that results in no preferential editorial treatment.)
Alternatives to Holiday Loans
In general, the best approach to making ends meet during the holidays is one that doesn’t involve debt. Instead of relieving the financial strain you feel, taking on debt to buy gifts or travel will likely add to it, making it even harder to improve your money situation in the new year. Peck offered some suggestions for people thinking about borrowing money during the holidays:
“They may consider spending less, giving homemade presents (such as baked goods or coupons for services, like babysitting) and opening a savings account to help plan for next year,” Peck said. “Other options include getting a side-hustle to make extra money during the holidays or even suggesting a year off from exchanging [gifts] among your circle and instead finding free or low-cost things you can do together.”
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.