Using a personal loan this holiday season could help you rein in your spending

‘Tis the season for holiday spending, and you can expect to be inundated with discount offers for opening a credit line when you shop. The warm fuzzy sound of Christmas music and twinkling lights may overshadow the pending reality of not knowing how much credit you’ve charged until the ball drops on New Year’s Eve.

While taking on debt to pay for the holidays should be the last resort, budgeting and using a personal loan could be useful strategies to avoid overspending this year. You’ll know exactly how much you spent, with the added benefit of a fixed monthly payment and definite payoff date.

If one of your New Year’s resolutions is to avoid starting the year off with a pile of credit card bills, a personal loan might help you keep it if you know the pros and cons of this installment loan option.

6 reasons to use a personal loan this holiday season

According to Bankrate’s Early Holiday Shopping Survey, many people plan to go into debt this season using credit cards paid over multiple billing cycles or BNPL services.

If you’re tired of the holiday spending hangover that comes from not knowing how much you spent until the credit card bills start, consider managing your holiday spending with a personal loan.

1. You’ll know exactly how much you’ve spent

When you get a personal loan, you receive all your money immediately. That means you have to determine how much you need ahead of time. You also won’t have to guess your payment since the repayment period and fixed rate are chosen before you receive funds.

If you put all the personal loan funds into a holiday spending account, once it runs out, you’re done. There’s no temptation to push the limits of a credit line and no chance you’ll damage your credit utilization ratio, which can damage your credit score.

2. You could pay less interest than credit cards – and your rate will be fixed

The average credit card interest rate is over 20 percent, while the average personal loan rate is slightly more than 12 percent. That could translate to big savings, especially if you’re carrying a balance on your credit card more often than not.

Another big plus: Personal loan rates are fixed, while credit card rates are variable. Consumers are still reeling from the impact of the Federal Reserve rate hikes to curb inflation over the past several years. Although the Fed started cutting rates in 2024, the cuts haven’t yet reduced credit card rates.

3. A fixed monthly payment may help you curb impulse spending

The minimum payment flexibility of credit cards makes it easy to carry a balance longer than you’d like. Bankrate’s Credit Card Debt Survey found that 50 percent of credit cardholders carry a monthly balance — up from 44 percent in January 2024.

Seeing how much you’ll be paying for the next 12 to 60 months may make you think twice about how much you spend this holiday season. Personal loans don’t have a minimum payment option, forcing you to pay the balance off on a fixed payment schedule.

Below is an example of how much you could save financing $2,500 worth of holiday gifts with a 12-month personal loan versus making minimum payments on a credit card based on current average rates.

Holiday spending comparison: Credit cards versus personal loans

4. You could improve your credit score

If you’re an early bird, like nearly half (48 percent) of holiday shoppers in America, you may have started your holiday shopping before Halloween, according to Bankrate’s Early Holiday Shopping Survey. One danger to using credit card debt is that it could raise your credit utilization ratio, which hurts your credit scores.

The bottom line is the more available revolving credit you carry, the more chance there is for a dip in your credit scores. Personal loans are an excellent remedy since they are installment loans. A bonus: Debt consolidation loan rates are typically lower than credit card rates, which could save you a bundle in interest charges.

5. You’ll have a definite payoff date

One major difference between revolving debts, like credit cards, and installment loans, like personal loans, is the repayment schedule. With an installment loan, you choose the number of years it takes to pay off the loan. Most personal loan lenders offer 24- to 60-month terms, but several offer terms as low as 12 months.

With a credit card, there is no set payoff date. The minimum payment option covers mostly interest, so your balance barely drops with each payment. And because credit is revolving, you re-set the clock on your payoff date every time you use your credit card.

6. Monthly payments are lower than BNPL plans

More and more retailers offer consumers buy now, pay later options, allowing buyers to spread the cost of small or big-ticket items out over four interest-free installments. If the short repayment period puts too much strain on your budget, consider a personal loan.

This might be useful if your year-end raise or bonus doesn’t hit your bank account until the first quarter of the next year and you need more breathing room in your monthly budget. An added perk: Most personal loan lenders allow you to pay the entire balance off early without penalty, which means you can use that bonus to clear the balance once you receive it.

When to avoid a personal loan for holiday spending

Debt should always be a last resort regardless of the season, but that’s especially true in certain situations related to personal loans.

• You don’t have a stable income. Committing to a regular fixed payment is not a good idea if you don’t receive a consistent paycheck.
• How you’re paid may be changing soon. If you plan to switch from a salaried job or position to one paid entirely on a commission basis, avoid personal loans.
• Dual income may be shifting to solo income. If you or a spouse plan to quit working to care for young children, return to school to pursue a higher-paying school major or foresee any major changes in your income, skip the personal loan option this year.

Bottom line

You won’t find many retailers suggesting personal loans this holiday season. They don’t come with all the fanfare other holiday products do, like sale discounts, cash-back rewards or bonus gift cards.

What they do offer is the peace of mind that comes with a predictable monthly payment with less risk of damage to your credit score. And a good credit score and less debt can be the gifts that keep on giving toward a more financially sound new year.