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The average shopper is expected to spend $1,638 on the holidays this year, according to PwC data, even though more than half of shoppers say money is tight. A holiday loan is a personal loan used for holiday expenses, but borrowing money to pay for your holidays generally isn't a good idea. Here's what to know about holiday loans work, why they may not be worth it and alternatives to consider before you start your holiday shopping
What Is a Holiday Loan?
Lenders sometimes promote holiday loans as the holidays approach. However, a holiday loan isn't a special type of loan; it's simply a personal loan you can use to cover holiday spending. Personal loans can typically be used for just about any purpose.
If you're considering applying for a holiday loan, be sure you understand the loan's key features, including:
- Loan amounts: You can generally find personal loans ranging from a few hundred dollars to $100,000. How much you can borrow will depend on your lender, your credit score and other factors.
- Repayment terms: Personal loans are repaid over a set time frame in fixed monthly payments. Loan terms may vary from one to seven years.
- Fees: Lenders may charge personal loan origination fees of 1% to 10% or more of the loan amount. You may also have to pay other loan fees, such as payment processing fees, application fees, late payment fees, returned payment fees and prepayment penalties.
- Interest rates: Personal loans typically offer fixed interest rates and level monthly payments, which can make it easier to budget for repaying your loan. Check a loan's annual percentage rate (APR), which incorporates the interest rate and any loan fees, to see how much the loan will cost you. In August 2024, the average APR for a 24-month personal loan was 12.33%, according to the Federal Reserve.
Are Holiday Loans Worth It?
With potentially high interest rates and upfront fees, holiday loans can be an expensive way to finance your holiday spending. It's generally not a smart move to borrow money for discretionary purchases, no matter how non-negotiable holiday gifts may seem. If you can't afford your holiday purchases without a loan, you could have a difficult time making loan payments.
Holiday loans add to your overall debt, which can make it harder to pay your other bills and save money. If too much of your monthly income goes toward paying off debt, you may have trouble qualifying for loans and other types of credit, or you may have to pay higher interest rates to borrow money or get a credit card. Your credit score could also suffer if your loan payment is late or you can't repay the loan.
Holiday Loan Alternatives
Fortunately, there are plenty of better alternatives to holiday loans to help get you through the holiday spending months.
Use Savings
Avoid going into debt by buying holiday gifts with money you saved specifically for holiday shopping. If you can put aside $100 a month in a sinking fund, you'll have over $1,000 saved by the time the holidays roll around. Help your cash grow faster by keeping it in a high-yield savings account, which typically earns more interest than a traditional savings account.
Doing a savings challenge can help build your holiday bank account fast. Try a no-spend week, for example, or give up restaurant meals and takeout for a month. Comb through your monthly credit card and bank statements and cancel any subscriptions, memberships or services you no longer use.
Just be sure to avoid using your emergency fund for holiday shopping. This money is meant for a rainy day, and using it for discretionary purchases puts you at risk financially should you run into an emergency.
Find High-Yield Savings Accounts
Pay With a Cash Back Rewards Credit Card
Shop with a cash back rewards credit card and redeem your rewards for cash back or a statement credit that you can use to offset your holiday spending. Some rewards credit cards also let you redeem points for gift cards that you can give as gifts or use to make holiday purchases. Rewards cards may also offer an introductory bonus to new cardholders, such as cash back or gift cards if you spend a certain amount of money within a certain time after opening your account.
You'll typically need good to excellent credit to qualify for rewards credit cards. Be careful not to overspend: If you can't pay off your credit card purchases when your bill is due, your remaining balance will accrue interest that can easily wipe out the rewards you earned.
Use a 0% Intro APR Credit Card
Opening a new credit card with an introductory 0% APR on purchases could give you some wiggle room to pay off your holiday tab. You can typically find credit cards with introductory 0% APRs on purchases for six to 15 months or more. Buy holiday gifts with the card and, as long as you pay off the balance before the promotional period ends, you won't accrue any interest on your purchases. Just be sure to budget enough to pay off the credit card balance in full before the promotional period is up.
Take Advantage of Credit Card Installment Plans
Some credit cards offer installment plans or extended payment plans for eligible purchases. This typically gives you the option to put purchases above a certain dollar amount (such as $100) on a payment plan and pay them off over time. You may be charged a fixed interest rate, a fixed monthly fee or, in some cases, no interest or fees at all.
Weigh any installment plan offer against your credit card's purchase APR to see if the installment option offers any savings. Also make sure you understand any fees or interest you'll face if you don't pay off the balance before the installment term ends.
Consider Buy Now, Pay Later Plans
Many retailers offer buy now, pay later (BNPL) plans, which let you buy items, get them right away and pay the bill in regular payments over a certain period, such as six weeks. Unlike credit cards, BNPL plans require no credit check, making them an option if your credit is less than stellar. Because BNPL plans typically don't charge interest as long as you make your payments on time, they offer a way to spread your holiday spending over time without incurring extra costs. However, not all retailers offer BNPL plans.
If you make lots of purchases using BNPL, keeping track of payment due dates can be complicated. Missing a payment could trigger fees or interest, so it's important to understand the terms of any BNPL agreement and budget for payments.
Use Gift Cards
There are several ways to work unused gift cards into your holiday spending plan. You can regift the card to someone who will use it or use the card for holiday purchases, so you don't have to tap your cash. Another option is to use gift cards for non-holiday spending and put the money saved into your holiday fund. For instance, if you use a $100 grocery store gift card for your weekly shopping, you can put the $100 you would have spent toward holiday gifts.
Earn Extra Money
The holidays are an ideal time to find part-time work. Many retailers hire extra hands for the holidays. Working at a store that offers employee discounts on purchases could help stretch your holiday budget even further. Delivery drivers are in demand this time of year; a side gig driving for Uber, Lyft or Amazon can put extra money in your pocket. You can earn holiday cash (and clear space for new gifts) by selling unwanted items on sites like eBay, Amazon, Facebook Marketplace or Poshmark.
Use Your Holiday Bonus
Do you have a holiday bonus on the horizon? Depending on the timing of your bonus, you could wait until you receive it to go holiday shopping or use a credit card for holiday purchases and devote your bonus to paying the bill. Don't try this tactic unless you're confident of your holiday bonus, however. Otherwise, you could end up with a bill you'll struggle to pay.
Cash in Unused Vacation Time
Some employers allow employees to trade unused vacation time for cash. If yours is one of them, consider swapping a few vacation days to help finance your holiday expenses. Of course, you don't want to empty your vacation bank completely, so it's best not to try this unless you have plenty of vacation time left.
The Gift of Good Credit
Some 43% of consumers are heading into the holidays with more debt than last year, according to Salesforce data. A holiday loan that adds to your debt burden could put a damper on the season's good cheer. Instead, set a realistic holiday budget and opt for financing methods you can pay off on time so you don't risk your credit score. Maintaining good credit can expand your financing options and save you money on interest rates. Think of it as the gift that keeps on giving.