What is a holiday loan? How they work and top alternatives

The National Retail Federation (NRF) projects holiday retail sales to rise between 2.5 and 3.5 percent in 2024 — and up to 9 percent for online sales. But while giving gifts can be a great way to show that you care about your loved ones, 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 before borrowing.

What are holiday loans?

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. Credit unions and local banks are the most likely to offer holiday loans, but you may be able to find them from an online lender or national bank.

Unlike other personal loans, holiday loans are only available during the holiday season — usually November and December. They also tend to be smaller loans, ranging from $500 to $2,500, although some lenders may offer much as $5,000.

Holiday loans have shorter repayment terms as well. 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 November and December could be covered.

• 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 like airplane tickets, hotels, rental cars and 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.

Paying for travel with a holiday loan

According to Bankrate’s 2023 holiday travel survey, 77 percent of holiday travelers 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 may be tempting. However, loan interest rates currently average 12.43 percent. This means that holiday loans are likely not the best route to take when it comes to your future financial health.

Coming home — or going away on vacation — for the holidays may be non-negotiable, but that doesn’t mean that you need to take out a loan to cope with inflated prices. Consider 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.

Should I borrow a holiday loan?

If you qualify for a reasonable rate on a holiday loan and have the means to make timely payments, it could be ideal to help you fill a gap in your budget. That said, there are instances where you should avoid borrowing and seek an alternative instead.

When to use a holiday loan

A holiday loan may be appropriate if:

• You’re eligible for competitive terms and can pay the loan off quickly.
• You’re expecting a financial windfall in the near future that allows you to eliminate the balance within a month or two.
• You’re disciplined enough to only borrow what you can comfortably afford to pay back within a short period of time.

When not to use a holiday loan

You may want to avoid a holiday loan if:

• You have a tendency to overspend during the holiday season.
• You qualify for subpar loan terms because your credit score is low or your debt-to-income ratio is high.
• You can only afford the payments on a holiday loan with an extended term.

What 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 personal loan 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 would only receive $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 save 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. He also suggests setting up an automatic transfer of $100 per month — or whatever you can afford — from your checking to a savings account designated for your holiday fund.

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.”

Pay with a credit card

Consider applying for a 0 percent APR credit card to fund your holiday expenses. The primary draw is the ability to avoid interest charges during the promotional period, typically between 12 and 21 months. This gives you an ample amount of time to pay off the balance and steer clear of borrowing costs. Still, you want to keep your spending in check or you risk paying a hefty sum of interest on the remaining balance once the introductory period ends.

Similarly, a credit card you already have can finance smaller expenses throughout the holidays. Just be sure to spend within your means. Making minimum payments can be appealing, but interest can quickly pile up if you don’t pay off the balance by the end of your statement.

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.

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.