What Is a Holiday Loan?

A family makes cookies while the dad reviews the holiday budget
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DEFINITION

A holiday loan is a personal loan that you can use to pay for holiday-related expenses, including gifts, travel, and large meals.

Definition and Example of a Holiday Loan

A holiday loan is a type of personal loan that's used for holiday-related expenses. These loans are offered by banks, credit unions, and online lenders.

A holiday loan has a fixed interest rate, fixed monthly payment, and a set loan term, typically offering a predictable repayment schedule from six months to five years. Some lenders may charge an upfront origination fee to cover the costs of creating the loan.

Depending on the lender, you may be able to borrow up to $5,000 to purchase gifts for loved ones or to pay for other holiday expenses like festive meals and plane tickets.

The origination fee is typically deducted from the loan before the amount is transferred to the borrower.

How Holiday Loans Work

Like many personal loans, most holiday loans are unsecured and don't require collateral as long as you meet the lender’s qualifications. However, some lenders may require you to secure larger loans with collateral, such as a vehicle. Your income and credit rating typically affect your interest rate, loan amount, and, ultimately, your monthly payment.

Some lenders allow you to pre-qualify for a holiday loan with no impact to your credit score by providing a few pieces of financial information. Pre-qualifying allows you to compare loan offers based on their terms, APRs, monthly payments, and origination fees, which can be as high as 10% of the loan amount. Each of these costs affects the overall cost of the loan.

Of the options available, holiday loans from credit unions may be more attractive, as long as you're a member in good standing. Some credit unions offer lower interest rates or don’t require a credit check.

How Much Do Holiday Loans Cost in Interest?

The amount of interest you will pay on a holiday loan depends on many factors. Imagine you'd like to borrow $5,000 for gifts and travel. You'd be considering a 24-month holiday loan with a 19% APR and a 3.7% origination fee. If your lender were to deduct the origination fee off your loan at the start, you’d only receive $4,815—which might not pay for all the expenses you had planned to cover. To account for this fee, suppose you request a $5,200 loan. After 24 monthly payments of $262.12, you'd have paid $1,091.00 in interest and a total of $6,291.00.

Shopping around to find a lender that doesn’t charge an origination fee can help you save. The same loan with no origination fee would have monthly payments of ​​$252.04 and a total interest cost of $1,049.03, bringing the total repayment amount to $6,049.03.

Increasing the loan term is another way to lower your monthly payment, but this strategy increases the total interest you’ll pay. Consider our $5,000 loan at 19% APR but with no origination fee. Spreading the payments over 36 months lowers the monthly payment to $183.28 but increases the interest to $1,598.08. You'd pay back a total of $6,598.08.

Repaying the loan sooner saves you the most interest, but it also means you'd have a higher monthly payment. Choosing a 12-month loan would mean you’d have a $460.78 monthly payment, but you'd only pay $529.39 in interest over that term. The total repayment would be $5,529.39.

If you accept a holiday loan, expect to start making monthly payments either directly or through autopay about 30 days after you receive the funds, but check your loan agreement to be sure. You must make your monthly payments on time to avoid late fees.

Pros and Cons of Holiday Loans

Pros
  • Pre-qualify without affecting your credit

  • Interest rates may be lower than those for credit cards

  • Fixed monthly payment and loan term


Cons
  • Potential upfront fees

  • Potentially high APRs if you have a low credit score

  • Increased debt load

  • Collateral may be required for larger loan amounts


Pros Explained

  • Pre-qualify without affecting your credit: Many lenders allow you to provide a few pieces of information and learn whether you're pre-qualified for a holiday loan. Pre-qualifying makes it easier to find the best loan without impacting your credit score.
  • Interest rates may be lower than those for credit cards: Some holiday loan APRs may be lower than average credit card APRs, saving you money on interest.
  • Fixed monthly payment and loan term: A set repayment schedule makes it easier to budget and gives you a firm timeline for paying off your loan. 

Cons Explained

  • Potential upfront fees: Some lenders may charge an origination fee, which may increase the amount you need to borrow and the amount of interest you pay overall.
  • Potentially high APRs if you have a low credit score: APRs for holiday loans are often based on your credit rating. A low credit score may limit you to higher APRs, which increase your monthly payment and could make the loan more difficult to afford.
  • Increased debt load: Borrowing for holiday gifts adds to the amount of debt you're carrying. A high debt load can impact your credit score and increase your APR for future credit cards and loans.
  • Collateral may be required for larger loan amounts: Some lenders may require you to offer collateral, particularly for high loan amounts. If you accept the loan, you risk losing your asset if you fall behind on payments.

Alternatives to Holiday Loans

Personal Line of Credit

A personal line of credit is an amount of money you can borrow from over and over for a given period of time. Unlike a loan, a line of credit doesn’t require you to take the full amount available to you, which might help you keep holiday spending to a minimum. 

P2P Loan

Peer-to-peer loans (P2P loans) are available from businesses or even other consumers through online marketplace platforms. Interest rates may be higher than those on a holiday loan but lower than those on credit cards. People with short credit histories may find it easier to get approved for a P2P loan over a bank loan.

Credit Card

Using a credit card may be preferable to taking out a holiday loan, particularly when you can take advantage of a promotional APR offer. For example, a credit card offering a long 0% APR period would allow you to pay off the balance over time with no interest.

Some credit cards allow you to use your existing available credit to access a low, fixed-rate loan with a lower APR than for regular purchases. You won't have to apply for a new loan, because you're tapping into your unused credit. This option may also help you avoid fees. 

Buy Now, Pay Later (BNPL)

BNPL financing allows you to make short-term, fixed installment payments on purchases, sometimes with no upfront credit check and no impact to your credit as you repay the loan. Many retailers offer BNPL as a payment option that allows you to pay off your balance, usually over bi-monthly or monthly payments.

Reduce Your Holiday Budget

Narrow your list so you can get all of your shopping done with the cash you have. Tightening your holiday budget may mean buying fewer gifts or shopping for fewer people, but it will keep you from taking on more debt. You can also get creative about your gifts: Consider giving affordable experiences, handmade items, and other free or low-cost options. 

Take on Temporary Holiday Work

Many retailers look for extra help over the holidays. Consider applying for a temporary holiday job or picking up extra shifts at one you already have. Bringing in extra cash would give you the flexibility to spend a little more on gifts without having to borrow money. 

Use Credit Card Points

Depending on your credit card’s rewards program, you may be able to redeem points as a statement credit or deposit them to your bank account to cover any gifts you've already put on your credit card. You might also be able to get more out of your rewards by redeeming them for gift cards, which you can give as gifts or use to purchase a gift from a retailer.

If you were planning to use a holiday loan to cover travel costs, check whether you can redeem your travel rewards instead.

Key Takeaways

  • A holiday loan is a type of personal loan that can be used to purchase holiday gifts or cover travel expenses.
  • Loan terms, interest rates, fees, and monthly payments can vary, depending on the lender and your credit standing.
  • Instead of taking out a holiday loan, consider alternatives that may allow you to borrow for less—or even avoid holiday borrowing completely.