Christmas Loans: What They Are and Should You Get One

The holidays are an expensive time of year. You’re splurging on gifts, food, travel, and decorations – not to mention the tree. It can all eat into your budget rather quickly.

For this reason, people sometimes take out Christmas loans. These provide them with the extra cash they need to cover all the costs until January and February come around.

What Is a Christmas Loan?

These loans are essentially just standard payday loans going by a different name. Just like their run-of-the-mill counterparts, they’re high-interest unsecured loans designed to be paid back within a few weeks. 

For instance, suppose you borrow $500 for gifts over the Christmas period. If interest rates are 390% per annum – which is standard for payday loans – you’ll fork out around $75 per month in interest payments alone.

Because of this, you want to be absolutely sure that a Christmas loan is right for you and that you can pay it off quickly. If not, you may be spending more money than you anticipated.

Furthermore, some payday loan companies will ask for the right to access your bank account to take the money directly. If you grant this permission, they will collect repayments according to a schedule, potentially depriving you of money in the weeks and months that follow.

It’s in your best interest that installments are paid off as quickly as possible, but granting the lender direct access to your account is never a good idea.

Potential Problems With Christmas Loans

Let’s look at some of the problems associated with Christmas loans and how they affect your budget:

• High interest rates: Like any other form of unsecured borrowing, these loans feature very unfavorable interest rates: Christmas loans come with interest rates. You’ll pay fees that are the same as a conventional payday loan – in the 300 to 500% per annum range. If you don’t pay back these loans quickly, the amount of money you owe can spiral upwards quickly. 
• A worsening financial situation: If you lose your job or have to take a pay cut in January or February, it can severely affect your capacity to repay your loan. You might not be able to meet the loan’s terms, increasing your overall liability and leading us to our next point.
• Credit score issues: Failure to make repayments on time will also impact your credit score, making it harder to get loans at affordable interest rates in the future.
• High fees: Some lenders may charge you a prepayment penalty or origination fee. A prepayment penalty is an extra fee you pay if you repay the loan early. Origination fees cover the cost of customer service associated with administering the loan. 

Remember, you don’t have to accept the first loan that comes along. Compare interest rates, fees, and terms from various providers and see which offers the best deal.

Be aware, prices can vary substantially. Always compare factors such as the annual interest rate before making your choice.

Alternatives To Christmas Loans

Many of the alternatives are examples of “buy now, pay later” financing. However, even that can be pricey, particularly for those with credit scores below 689. 

Credit Cards

Using credit cards strategically is an excellent way to avoid some of the high fees associated with loans you’d take out for the holiday season.

For instance, cash back credit cards sometimes let you use up points over the holiday period or offer special financing arrangements.

The best strategy is to leverage 0% APR credit card deals, usually only available for new customers. Depending on the provider, these schemes don’t charge you any interest on balances for the first three to twenty-four months.

As such, they afford you enough time to repay all your holiday expenses once the new year rolls around. 

Try to resist the temptation to use your full interest-free credit limit. While having extra purchasing power can feel good in the short term, you will still need to pay it off eventually – and that means fewer resources down the line.

Bumping right up against your credit limit can also adversely affect your credit score, increasing the cost of other loans you might want to take out. 

Cash Advances

Cash advances offered by credit card companies allow you to convert your existing credit balance into cash you can spend today. Issuers usually charge between 3 and 5 percent of the amount you want upfront for this service and impose minimums on how much you can withdraw – usually $20 or more. 

Moreover, you’ll pay a slightly higher APR on any money you borrow than on regular card purchases. Because of this, they are usually only marginally cheaper than Christmas loans. 

Buy Now, Pay Later

Retailers know that consumers can struggle to pay for all goods they want over the holiday season, so many of them now offer so-called “buy now, pay later” schemes. The idea is pretty simple: you get to take possession of the item now, and then you repay the seller later in a series of installments. 

Loans of this type typically last from six weeks to three years. Interest rates vary from 0% to 30%. If the interest rate is zero, it usually means that the upfront cost of the item is higher than it otherwise would be (perhaps because of seasonality). 

How much you have to pay in interest depends on your credit rating. Consumers with higher scores can borrow at lower rates. 

Loan Apps

Another option is loan apps. These will sometimes give you a small advance on your paycheck (provided you have a regular income). People typically use these for last-minute purchases when their bank balance is running low.

There are some interest-free apps, but these may still ask you for a tip or a monthly subscription to pay for the cost of capital.

Credit Union Loans

If you’re a member of a credit union, you may be able to apply for an affordable holiday loan at 27 percent per annum or less.

These loans typically run between one and seven years (a long time to be paying off seasonal expenses) but offer flexible terms and lower rates than the competition.

Some loans are available for as little as 6% per year for those with good credit scores. 

How To Find The Perfect Holiday Loan

Don’t just grab the first holiday loan you can find. Instead, do the following:

• Check the interest rate: Find out how much the loan will cost you per year by checking the APR. Credit cards tend to be the most expensive, followed by personal loans and credit union loans. 
• Consider speed of funding: Next, find out how long it will take to get the money you need. Usually, online lenders are faster. If you already have a credit card, you can get extra cash almost immediately, while “buy now, pay later” schemes require more paperwork. 
• Choose a monthly repayment plan that suits you: Check monthly repayment amount. See how much you owe and over what time period it should be repaid. Lower monthly repayments typically mean you’ll end up paying out more in interest overall. 
• Try to prequalify: Lenders may let you prequalify via “soft” credit inquiries that don’t affect your score. 

Wrapping Up

Christmas loans are simply holiday loans that provide the extra cash you need if you're feeling the pinch over the holiday season. Having said that, they are personal loans in all but name, meaning that they carry high rates of interest.

Thus, you need to be absolutely sure you’re going to benefit from them before you take one out. Our advice? Always check for cheaper sources of credit elsewhere before getting one.