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From vacation trips to gifts under the tree, Christmas costs can add up quickly. If you’re feeling strapped for cash, you may be considering a loan to get you through the season.
Christmas loans are a type of personal loan designed for holiday expenses. You can borrow one to pay for gifts, trips, or just about any other legal purpose. You will receive a lump sum up front, which you will repay over time, usually with fixed monthly payments.
The terms of your loan vary by lender. Borrowers with good credit will generally qualify for better rates and more favorable terms, while borrowers with bad credit may have fewer options or receive higher interest rates.
Christmas loans can be unsecured or secured with collateral. To qualify for an unsecured loan, you will generally need good credit and sufficient income. The requirements for getting a secured loan tend to be more flexible, but you risk losing your collateral if you can’t repay what you’ve borrowed.
How do Christmas loans work?
You can usually find Christmas loans from online lenders and credit unions. Many banks also offer personal loans, although they don’t call them Christmas loans. Each lender determines its own rates, terms and application process. Because of these differences, it’s a good idea to shop around and compare options.
Some lenders require a minimum credit score, while others don’t check your credit at all. However, lenders who do not require credit checks usually charge high rates. In fact, these Christmas loans no credit check are basically payday loans with fees amounting to interest rates of 400% or more.
In contrast, traditional personal loans typically cap their interest rates at 36%, with some lenders offering rates as low as 4% or 5% to creditworthy borrowers. While you may be attracted to the fast funding and flexibility of a no credit check Christmas loan, we don’t recommend it due to high borrowing costs.
How to get a Christmas loan
If you are interested in borrowing a Christmas loan, follow these steps:
- Check your credit. Before you take out a loan, it helps to know your credit score and what’s on your credit report. The stronger your credit, the better the rate you will likely get on a loan. You can check your credit score for free through various credit monitoring services and pull your credit reports through AnnualCreditReport.com
- Compare the prices. Compare several options before choosing a lender to find the best rates and conditions. You can usually find Christmas loans from online lenders and credit unions. If you want to borrow from a credit union, remember that you will need to become a member if you are approved and want to take the loan.
- Estimate your borrowing costs. Before borrowing, use Forbes Advisor’s Personal Loan Calculator to determine your loan costs. As mentioned, some Christmas loans are simply payday loans with exorbitant interest charges. Check if borrowing costs are acceptable before taking out a loan.
- Check your budget. Christmas loans are usually installment loans that you repay with fixed monthly payments. Make sure you can afford the monthly payments before you borrow so you don’t risk overdraft charges on your bank account or late payments on your loan.
- Submit your application. If you have found a loan offer you like, you can submit an application. You will need to provide personal information and any documentation required by the lender. The lender may or may not perform a serious credit check, which could temporarily lower your credit score by a few points.
- Track payments. If you are approved for the loan, check when your first payment is due. It may be a good idea to set up automatic payments from your bank account (if the lender hasn’t already) so you don’t fall behind; many lenders offer discounts on autopay rates. Make sure you have enough cash in your account to avoid overdraft charges.
How to get a Christmas loan with bad credit
Some online lenders offer bad credit Christmas loans. In fact, some types of Christmas loans do not require any credit checks. As mentioned, however, these no credit check loans are likely to be expensive.
Also, while these loans can provide quick and easy-to-obtain financing in an emergency, they don’t offer a long-term financial solution. According to the Consumer Financial Protection Bureau (CFPB), consumers who take out one unaffordable payday loan often end up taking out another to pay it off, getting stuck in a debt trap.
Advantages and disadvantages of Christmas loans
Before getting a Christmas loan to cover your holiday expenses, consider these pros and cons:
Benefits of Christmas Loans
- Quick funding: Some Christmas lenders promise financing within one business day.
- Flexible lens: You can use a Christmas loan to cover the cost of gifts, travel or any other holiday expense.
- Fixed payments and interest rates: Many Christmas loans have fixed rates and monthly payments, so you don’t have to worry about your bills changing over time.
Disadvantages of Christmas Loans
- Potentially high interest rates: The loan may come with high interest charges, which means that your Christmas expenses will be much higher in the long term than they were at the time of purchase.
- Could be a payday loan: Some online Christmas loans are simply payday loans with a different label. These loans often come with fees equivalent to annual percentage rates (APR) of 400% or more. Additionally, a lender may ask you to provide your bank account information up front so they can make automatic withdrawals whether or not you have enough money in your account.
- Could lose warranty: If you take out a secured Christmas loan and cannot afford to repay it, you risk losing the asset you pledged.
Other options for buying Christmas gifts
Because Christmas loans can be expensive, it’s worth exploring other options. Here are some other types of financing to consider:
Buy now, pay later
Buy Now Pay Later (BNPL) programs have become increasingly popular in recent years. As the name suggests, BNPL options allow you to purchase an item immediately and then pay it back in installments over time.
Some BNPL programs offer 0% interest. Often they ask you to pay 25% of the item price upfront, followed by three additional payments every two weeks. Other BNPL options offer longer repayment terms, although they may also charge interest.
You may be able to choose BNPL at checkout or use a BNPL app to fund your purchases. Be sure to read the terms and conditions of the contract before proceeding.
Credit cards are another option for covering your Christmas expenses. Keep in mind that credit cards can have high APRs if you don’t pay off your balance in full each month. The average APR is 15.13% in May 2022, according to the Federal Reserve.
However, you may be able to qualify for a new credit card with a 0% APR promotional period that ranges from 12 to 24 months, depending on the card. This means you could avoid interest charges if you pay off your balance before the end of this period.
Keep in mind, however, that the interest charges will come into effect at the end of the promotional period. Be careful not to charge more than you can afford to pay within the specified time frame.
Perhaps the best way to afford the holiday season is to avoid going into debt altogether. Instead of paying monthly installments on a loan after Christmas, consider setting up automatic transfers from your checking account to a separate holiday savings account in the months leading up to Christmas.
Also, be sure to come up with a realistic spending plan that fits your budget. If you find yourself spending beyond your means, review your budget to remind yourself of what you can afford this year. By setting limits in advance, you may be able to get through the holiday season debt-free for the New Year.
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