What is a holiday loan?

The National Retail Federation (NRF) projects holiday retail sales to rise between 6 to 8 percent in 2022 — and up to 12 percent for online sales. But while giving gifts can be a great way to show that you care about them, buying them can be expensive. 

Holiday loans can be a tempting way to cover gaps in your budget, but they may increase your overall financial difficulties. While there can be limited circumstances where they are useful, fully explore holiday loan alternatives first. 

What holiday loans are 

A holiday loan is a type of personal loan meant for seasonal spending. Like any other personal loan, 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, while other personal loans give you years to repay your debt. 

What can you use a holiday loan for? 

Holiday loans are not just for spending on gifts. Any short-term expenses during the November and December season could be covered. 

• Purchasing gifts. If you don’t have enough money set aside to buy a gift for everyone on your list, a holiday loan may help. 
• Travel. Holiday loans can cover bigger travel expenses for things like airplane tickets, hotels or gas.  
• Other expenses. 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. 

Should I use a holiday loan to pay for inflated travel prices?

According to Bankrate’s 2023 holiday travel survey, 77 percent of holiday travelers have reported changing an aspect of their plans as a result of inflation or high travel prices.

If you’re like most Americans and have had to change some of your travel plans due to inflation, using a loan to finance holiday travel prices seems tempting. However, that’s likely not the best route to take when it comes to your future financial health. Loan interest rates currently average at 11.54 percent, meaning you could be paying down your holiday trip for years.

Coming home — or going away on vacation — for the holidays may be a non-negotiable, but that doesn’t mean that you need to take out a loan to cope with inflated prices. Consider the alternatives, like financing through a travel company, using a third-party discount travel service or driving to your destination. You can also borrow the funds from a family member or friend and repay the balance in monthly installments to avoid interest costs.

Factors to consider when getting a holiday loan 

You should always check the lender’s range of rates, fees and repayment terms before applying.  

Interest rate 

The interest rate is the cost of borrowing. The higher the rate, the more you’ll pay. The lower the rate, the less you’ll pay.  

Personal loans — including holiday loans — tend to have lower interest rates than credit cards. The better your credit score, the more likely you are to qualify for a competitive APR from a top lender.  

However, each lender determines its rates differently. And even if you qualify for low rates with a holiday loan, there are some credit cards with a 0 percent APR purchase period that may result in you paying less overall. 

Fees 

In addition to interest, lenders will charge fees when you borrow. Origination fees are the most common, but there are also late payment fees and prepayment penalties you should be aware of. 

• 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 an origination fee of 3 percent, your loan balance will start at $1,030, even though you only received $1,000. 
• Late fee. Late fees are only charged if you don’t make your scheduled payment. However, they can be a big additional expense if you aren’t careful. Sign up for autopay or set a reminder in your calendar to stay on track. 
• Prepayment penalty. A prepayment penalty is charged when you make additional payments or pay off your loan ahead of schedule. These are rare with personal loans, so check if your lender charges one. 

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 time it takes to pay back your loan affects the total cost. 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. You should use a personal loan calculator to estimate potential payments based on your interest rate and loan term. 

Holiday loan alternatives 

Holiday loans can be risky because you’re borrowing money to buy things that you don’t truly need. If you can’t afford to travel or buy gifts, borrowing money can put you in a precarious financial position. 

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,” says Chicago-based certified financial planner Henry Gorecki. “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 

A holiday loan is one 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 would want you to go into debt to give them a holiday gift. You are likely to be better off finding other ways to show that you care. 

If you do decide that a holiday loan is the right choice, consider a general personal loan as well. It requires similar documents, and many lenders have a quick application process. Plus, you’ll be able to get a longer loan term, giving you lower monthly payments to help spread out the cost.