With the end of the year comes the holiday season, a time for rest, relaxation, visiting with family and gift-giving.

With the end of the year comes the holiday season, a time for rest, relaxation, visiting with family and gift-giving. The National Retail Federation (NRF) projects November/December retail sales to rise 8-10% in 2021. Giving gifts to your friends and family can be a great way to show that you care about them, but buying gifts can be expensive and a potential budget-buster.

If you want to buy a gift for your loved ones but don’t have enough money, you might be tempted to use a holiday loan to make up the difference. A holiday loan can seem like a good idea, but it can increase your overall financial difficulties. While there can be limited circumstances where a holiday loan can make sense, fully explore holiday loan alternatives first.

What is a holiday loan?

A holiday loan is a special type of personal loan designed specifically for the holiday season. Like typical personal loans, holiday loans let you borrow money quickly and easily without the need to provide collateral.

However, holiday loans are not exactly the same as other types of personal loans. One is that they’re only available during the holidays. You won’t be able to take out a holiday loan in the middle of May. Holiday loans also tend to have lower limits than other personal loans. Typically, credit unions and banks will 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’ll have only a few months to a year to pay back a holiday loan. Other personal loans give you years to repay your debt. These restrictions make it so that holiday loans should not be the first choice for most people looking for ways to make ends meet at the end of the year.

What can you use a holiday loan for?

Holiday loans are designed for the holidays, but they can be used for many different things.

The most obvious use of the funds is to purchase gifts. If you don’t have enough money set aside to buy a gift for everyone on your list, a holiday loan can help you bridge that funding gap.

The holidays are also a prime time for travel. Families come together from across the country to spend time together during the holidays. However, travel isn’t always cheap. If you have to go a long way to visit family, you could be looking at hundreds or thousands of dollars in travel expenses for airplane tickets, hotels or gas. Holiday loans can also cover these types of costs.

Most lenders won’t place restrictions on how you use the money. Like less-specialized personal loans, you can use the money you get from a holiday loan for almost anything.

Factors to consider when getting a holiday loan

If you’re thinking about applying for a holiday loan, or any type of loan, there are some things you should consider before you apply. You can use these factors to compare different loans to find the best one for your needs.

Interest rate

One of the first things you should look at when applying for any loan is the loan’s interest rate.
The interest rate is the cost of borrowing. The higher the loan’s interest rate, the more you’ll pay over the life of the loan. The lower the interest rate, the less you’ll pay. A loan’s interest rate also impacts the size of the monthly payment, giving borrowers even more reason to keep it in mind.

Rates charged for holiday loans are generally lower than what you’d pay on a credit card. A review of holiday loan rates now being offered by credit unions, for example, showed APRs ranging from 7.99 percent to 13.99 percent. In contrast, the average credit card APR in 2021 is about 16.3 percent, according to Bankrate data.


Many loans charge fees that can add to the overall cost. While borrowing money is almost never free, you don’t want to pay fees if you don’t have to.

One common fee for holiday loans is the origination fee. This fee is a percentage of the total amount that you borrow, and it’s added to your balance when the loan is funded. For example, if you borrow $1,000 with an origination fee of 3 percent, your loan balance will start at $1,030, even though you only received $1,000 in your checking account.

Some other fees that you might see include application fees, which are charged when you apply for a loan. You might also be hit with an early repayment penalty, a fee charged when you pay your loan off ahead of schedule.

Repayment term

The term of a loan is the length of time it will take to pay the loan back if you follow the minimum payment schedule. Most holiday loans have a loan term of six to 12 months.

The longer you have to pay back the loan, the lower the monthly payment will be. Shorter-term loans have higher monthly payments. A $2,500 holiday loan with a six-month repayment schedule, for example, will cost nearly $417 per month, not including interest. So, if that’s too much of a strain on your budget, going with a 12-month loan will cut that monthly payment in half.

The term of a loan also impacts its interest rate. Longer-term loans tend to be riskier than short-term loans because they leave more time for the borrower to experience a financial emergency like a job loss. This leads to loans with longer terms carrying higher interest rates.

Finally, the term of a loan affects the total cost of the loan. Even if two loans have the same interest rate, the longer it takes to pay off the loan, the more interest will accrue. That means long-term loans cost more than short-term loans.

Are holiday loans a good idea?

Holiday loans can get you the extra cash that you need to buy gifts, but borrowing money to purchase gifts is not a sound financial decision.

“Generally, I am against taking out a loan for holiday spending,” says Chicago-based certified financial planner Henry Gorecki. “Holiday spending is a luxury, not a necessity, and money for the holidays should’ve been budgeted for throughout the year. That being said, if a family still feels that it’s important to spend a certain amount of money (that they can’t afford) on the holidays and they’re going to do it anyway … a holiday loan at a decent interest rate is better than paying (higher) credit card interest rates.”

While it’s true that holiday loans are cheaper than credit card debt, going into debt when you can avoid it is a bad idea, so holiday loans should be avoided.

Alternatives to a holiday loan

If you need money for the holidays or want to give gifts to your loved ones, a holiday loan isn’t your only option. Holiday loans can be dangerous because you’re borrowing money to buy things that you don’t truly need. If you couldn’t afford to travel or buy gifts, borrowing money can put you in a precarious financial position.

Here are some alternatives that may be a better idea than applying for a holiday loan.

Start saving ahead of time

While it’s probably too late to do it for this holiday season, automatic savings plans are a great way to make sure you have some cash to spare for the holiday season.

“Pay yourself first and make it automatic,” Gorecki says. “At your bank, set up an automatic transfer of $100 per month from your checking to a savings account called Holidays 2021 or similar.” You can adjust the amount to suit your needs.

Making the transfers automatic is essential, Gorecki says. “If you have to log in and move the money every month, it probably won’t happen.”

Give homemade gifts

Giving someone a homemade gift is a great way to show that you care while avoiding breaking the bank. Best of all, you can play to your strengths. If you’re good at baking, bake your friends’ favorite dessert for them. If you’re an artist, you can make a painting to decorate a family member’s home. 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. Set aside a day to spend together or agree to 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 them know you’ll be there to help carry boxes.

You don’t always have to give material goods to show your loved ones that you care during the holiday season. Giving your time is a great alternative.

The bottom line

The holidays are a time of gift giving, and a holiday loan is one way to stretch your gift-buying budget. However, borrowing money when you can’t afford to give gifts is a poor decision. Few true friends would want you to go into debt in order to give them a holiday gift. You are likely to be better off finding other ways to show that you care.

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