Finances FYI Presented by JPMorgan Chase
Preparing for all the merry and bright holiday festivities — from hosting a food and beverage-filled holiday bash to checking loved ones’ gifts off your shopping list — can get expensive.
Many financial institutions offer short-term “holiday loans” to help you cover those extra seasonal costs.
But are holiday loans naughty or nice? If you’re considering getting one, it’s a good idea to explore the pros and cons before applying and signing on the dotted line.
Reasons You Might Consider a Holiday Loan
With soaring inflation rates and costs rising everywhere, you won’t be alone if you haven’t set aside holiday funds this year. That said, it doesn’t look like consumer holiday spending is slowing down.
Forrester’s U.S. end-of-year holiday season forecast projects that 2025 U.S. holiday retail sales will “outperform the previous two years.”
Specifically, the consumer research experts predict total U.S. holiday retail sales “will grow 4.4% year over year (YoY), reaching $1.05 trillion in 2025.” Online U.S. retail sales “will grow at 6.7% YoY, reaching $270 billion.”
For some shoppers feeling financially strapped as the season of giving looms ahead, a holiday loan seems like a simple way to cover those extra expenses.
Maybe you want to finance a holiday trip to a faraway tropical beach, or your last child is graduating from college. You might need a new set of tires so your car can safely navigate snow-covered roads. Or the family chose you to host the holiday reunion this year.
Whatever the reason for that extra spending, is a holiday loan really the answer? Or will it increase your financial stress?
Let’s look at the pros and cons.
Personal Holiday Loan Pros
The most obvious advantage of taking out a personal holiday loan is the quick, convenient injection of cash it delivers for qualified customers.
Additional advantages include:
- Customers can typically borrow a small amount of money with a holiday loan. Some lenders start short-term personal loans at $500 or $600 up to $5,000 (or could range to $25,000) — the amounts vary by lender.
- Personal loan interest rates are usually less than credit cards. Depending on your credit score, credit card interest rates can surpass 30%. Recent Federal Reserve data reports an average interest rate for personal loans at 9.51% and average credit card interest rates at 16.28%.
- If you have a good credit score, many lenders won’t require collateral.
- Adding a personal loan to your credit profile and making timely payments may potentially boost your credit score.
- Longer repayment terms and lower interest on personal loans can lower your monthly payments.
- Loan proceeds quickly improve your cash flow to cover your holiday wants and needs.
Personal Holiday Loans Cons
While holiday loans seem lucrative, they definitely have some disadvantages, including:
- You’ll pay interest on your holiday expenses, sometimes long past the end of the holiday season, depending on the length of the loan.
- Some lenders charge origination fees for the loan, and some charge prepayment penalties if you pay the loan off early.
- You might have to borrow more than you need if a lender doesn’t offer a small loan.
- If you have poor credit, you may not qualify for a loan — and the application can result in a “hard” credit inquiry that can lower your credit score.
- If you have a lower credit score, you might have to pay a higher interest rate on the personal loan, which will vary by lender.
- A personal loan will increase your debt, and the monthly payments could increase your financial stress over time.
How to Avoid a Festive Financial Trap – Holiday Loan Alternatives
When considering your holiday spending options, think about avoiding a “festive” financial trap and nixing taking out a holiday loan altogether.
For example, review your expenses as you head into the holidays and cut corners to help prevent overspending.
This could mean setting expense limits and creating a realistic budget for holiday gifts and food.
It could also mean drawing names with family members, so each person buys gifts for one person instead of multiple members.
Also, focus on spending time together doing low-cost or no-cost activities such as:
- Play holiday-themed games.
- Watch holiday movies.
- Decorate with handmade decorations.
- Give creative gifts like a poem, scrapbook, framed photo, or a tie blanket from old t-shirts.
- Volunteer at a soup kitchen or animal rescue center.
If you still need holiday cash, consider these holiday loan alternatives:
- Do a side gig to earn extra holiday income.
- Get a zero-interest credit card and pay off the holiday balance quickly.
- Split your purchase into equal interest-free payments with a Buy Now/Pay Later payment plan.
Overall, understanding the pros and cons of a holiday loan can help you make a wise financial decision that won’t put more stress on you than you can manage during the holiday season.
