Over the past few weeks, I’ve seen an abundance of offers for “holiday loans,” more than I recall seeing in previous years. Many credit unions and banks in my area are advertising these loans, pretty clearly targeting people who dream of a big holiday celebration that is beyond their current financial grasp.Let’s dig into the ins and outs of these financial tools.
A “holiday loan” simply means that a bank or other lending institution is giving you a personal loan. Its lending money without collateral, which means that there’s nothing it can repossess if you can’t pay it back, but with that comes a requirement for a credit check that shows that you have at least decent credit.
To get a “holiday loan,” you simply apply at a bank or credit union, either online or offline. It’ll check your credit history and if you have good credit, it’ll offer to lend you money now with a payment plan to be carried out in the coming year.
For example, you might be able to borrow $500 and have it in hand right now, but it may come with a payment plan that requires you to pay $75 a month for the following eight months. That adds up to $600 out of your pocket in the long run, of course, but it puts $500 in your hands right now.
There’s nothing really special about a “holiday loan” other than the time of the year that it’s marketed. It’s basically the same as a normal personal loan that you can get at a bank or credit union or other lending institution if you have good credit.
So why the special marketing?
People often take out “holiday loans” to get through expensive holiday seasons.
The reality is that the holiday season hits a lot of people right in the wallet, and quite hard. People love to give extravagant gifts during the holiday season because they want to make someone they love happy this time of the year, and it feels pretty good to have been the source of that joy. People also often need to travel this time of the year, and some people are dealing with extra expenses from hosting guests.
That adds up, especially when your means are limited, and thus lending institutions simply take their personal loan program and advertise it as a “holiday loan.”
There is a bit of a catch, however.
Holiday loans often have extra fees and high interest rates.
Although “holiday loans” at their core are just ordinary personal loans, banks realize that people often seek them out at high rates in December just to cover things like gifts and travel, so it often means extra fees and higher interest rates to “holiday loans” than to normal personal loans. You might be able to get a personal loan in July with minimal fees and a good interest rate, but in December you’ll be directed toward a “holiday loan” which comes with a fee or with a bit higher interest rate.
It’s supply and demand at work, and the holiday season increases the demand for personal loans. If lots of people are stopping by to urgently request a holiday loan to keep their holiday bills under control, then the banks can nudge up fees and interest rates a little because of the urgency and frequency of the requests.
Consider cutting back your holiday plans rather than going into debt for them.
In short, I feel that taking out a “holiday loan” in order to merely cover the expenses of a holiday celebration is a poor financial choice. Rather than putting yourself in that kind of financial hole, the first thing you should do is to look at cutting back on the expense of whatever you’re doing for the holidays.
For starters, remember that the thing that most people want for the holidays is time spent with people they love, not the perfect item under the tree. Yes, most of us like to open something during the holidays, but it doesn’t have to be the latest, most expensive item out there. Rather, aim for smaller and more meaningful gifts that don’t kill your wallet and send you into a spiral of debt and stress. You’re far better off giving a modest gift and actually being present in the moment than giving a big gift and being stressed out and distracted.
Another thing to remember is that you don’t have to travel for the holidays if it is a net negative for you. Simply skip the big trip this year and instead stay at home and celebrate locally. Alternatively, you might be able to find someone you can stay with at your destination rather than paying for lodging, or perhaps you can drive or borrow a car or take a bus or train to get there rather than flying.