Christmas loans: should you finance your holiday gifts?

Young Asian mother carrying shopping bag and using smartphone walking in downtown city street shopping with little daughterImage: Young Asian mother carrying shopping bag and using smartphone walking in downtown city street shopping with little daughter

In a Nutshell

If you’re not sure you can afford holiday spending, a Christmas loan may sound like a good idea. But before you take on debt with a loan, it’s important to understand the potential risks, like high fees and interest. Alternatives — like using a credit card or choosing from a robust field of buy-now, pay-later apps — may be better options.
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If holiday spending fills you with more anxiety than cheer, you’re not alone. From Christmas parties to special presents under the tree, the holidays can come with a lot of financial pressure.

Some traditional lenders market loans for the holidays specifically in anticipation of increased holiday spending on items like Christmas presents or food for a family dinner. But it’s important to keep in mind that a holiday loan can come with a hefty price tag in the form of high fees and APR.

Here are some of the important costs and risks to consider. We’ve also compiled some options that might help you hit your holiday goals without using a Christmas loan.

What are Christmas loans?

As you explore your holiday options, you may come across lenders specifically advertising “Christmas loans.” What they’re actually offering is a personal loan designed for people who need some extra money around Christmas or other winter holidays.

Just like other types of personal loans, a Christmas loan or holiday loan can be a secured or unsecured loan. Your terms and eligibility are determined by a variety of factors that vary by lender, including your credit and income. To qualify for the most-favourable terms and most-competitive interest rates, you need to have good credit.

Downsides to consider about Christmas loans

As with most forms of credit, both you and your lender face some risks. Here are a few of the disadvantages to sort out before applying.

  • Fees — Some lenders charge an origination fee or a prepayment penalty. These additional fees can add up.
  • Impact on credit — If you make a late payment or default on your loan, it can negatively affect your credit score. Pay close attention to the estimated repayment amount so that you know you can afford the payments.
  • Your financial situation could get worse — If you can’t repay your Christmas loan because of high interest rates or short repayment terms, you could end up making your financial situation worse.
  • Same as a payday loan? — Carefully check the terms of the loan you’re considering, especially if you’re looking to borrow $500 or less. The offer may actually be just like a payday loan. Given how much it could end up hurting financially, it’s the type of loan that’s best not to consider unless you’re facing a true emergency with no other options.

Pro tip: When shopping for a Christmas loan or holiday loan, always be sure to compare the fees, interest rate ranges, loan amounts, monthly payments and borrower requirements for different lenders. Comparing lenders and different types of loans will help you find the best loan options available for you.

What to consider if you’re shopping for a Christmas loan

If you still think a Christmas loan might be your best option, here are a few things to consider.

  • Prequalification — Some lenders let you prequalify for a loan by pulling a soft credit inquiry, which won’t affect your credit score. Submitting several prequalification applications can help you narrow down your list of lenders and compare offers.
  • Monthly payments and a fixed timeline — Christmas loans are installment loans. That means they’ll have monthly payments due over a specific amount of time. You’ll want to plan for this in your budget and be sure you can afford the payments.
  • Interest rates — Depending on loan terms and how your credit looks, personal loans tend to have lower interest rates than credit card interest rates. Check the terms and math carefully to see if taking out a personal loan may save you more than a credit card would.

Fast funding if approved — If you choose an online lender, generally the application and funding process is quick and easy. If you’re approved, you might even receive your loan the same business day, giving you more time to prep for the holidays.

Other holiday financing options

Ideally, planning ahead and budgeting for your holiday expenses is the best way to enjoy the season while avoiding a post-holiday financial hangover. But we know that’s often not realistic or possible — sometimes basic necessities cut into our holiday budgets.

But there may be options for you that are less risky and costly than a Christmas loan. Here are a few possibilities.

Credit cards

When used strategically, a credit card may be worth considering. If you have a cash back credit card, you may be able to leverage points or special financing for holiday expenses.

You can also consider applying for a credit card that offers an intro 0% APR for your purchases. If you can get one with an intro period between 12 and 21 months during which interest won’t accrue on your purchases, that may give you enough time to repay your holiday expenses without interest adding to the cost. You’d just have to pay off your balance before the introductory period expires.

Remember that it’s a good idea to only buy what you can comfortably afford to pay back during an no-interest intro period, no matter how big your credit limit might be.

Cash advances

With a cash advance, you’re essentially using your available credit on your card to take out a loan for cash in hand. Credit card companies typically charge a cash advance fee and a different APR for the distributed cash amount (often higher than the APR for regular purchases).

With that higher cost in mind, unless you really need or want actual cash, you should consider another option.

Next steps

Creating a realistic holiday budget can be a great way to view your regular expenses and holiday expenses in one place and track your spending.