What Is a Holiday Loan?

Definition & Examples of Holiday Loans

A shopper checks her spending totals after a long day of holiday shopping.
••• Betsie van der Meer / Getty Images​

A holiday loan is a relatively short-term personal loan made by a bank or credit union in amounts ranging from $500 to $5,000.

Learn when you might need a holiday loan and how it works.

What Is a Holiday Loan?

A holiday loan is an unsecured loan that may have a higher interest rate than a loan secured by one of your assets. It typically has a fixed interest rate, which means it doesn’t change during the life of the loan and is paid off in monthly installments.

Holiday loans are not payday loans or cash advance loans, both of which have high interest rates. Since a holiday loan is not secured by collateral, a lender has no recourse if you default on the loan. The lender can, however, garnish your wages and send the debt to collection agencies, which makes you subject to a lawsuit and affects your credit rating.

How Holiday Loans Work

Even though the interest rate on a holiday loan is a little higher than on loans backed by collateral, it is not as high as the annual percentage rate (APR) on credit card charges. Run your loan options through our calculator to find out how much you might have to pay in interest until the loan is paid off:

Do I Need a Holiday Loan?

A holiday loan may be a solution to your debt hangover at the end of the holiday season, especially if you are the type of person who gets carried away and goes overboard forgetting all about budgeting during the holiday season.

Before the holiday season begins, do some planning. If you don’t have a dedicated holiday savings account or the extra income in your budget during the months of October, November, and December to use toward gifts, then you have to dip into your regular savings or borrow from another source.

Holiday loans don’t have to be used for just traditional gifts. They can be used for holiday trips for the family or trips as gifts.

Types of Holiday Loans

There are four popular options for the holiday loan and their requirements:

  1. Personal Loan: This is the traditional unsecured loan, with a term from one to five years, and a fixed interest rate. You must have a good credit score to qualify since you are not required to put up collateral. You can go to a commercial bank or a credit union for this type of loan. A credit union is a good choice since they only charge interest on the unpaid balance during repayment. If you have very good to excellent credit or have an account with a credit union, this loan may be for you—but not for five years.
  2. Personal Credit Line: A personal credit line is a likely choice for a holiday loan only when your need is great. You are granted a line of credit by a financial institution and withdraw funds from it as needed. It is unsecured, but it has no ending date. As you repay the principal, you can reuse the funds. These loans are often used for an ongoing project. The interest rate will be higher than for a personal loan. You must have an excellent credit score to qualify.
  3. Peer-to-Peer Loan (P2P): Peer-to-peer lending is a relatively new idea in lending that is popular with the holiday loan crowd. Through an online loan platform, you borrow from individuals or investors. You make a loan request on the loan platform and it goes out to many possible lenders. You may get back any number of offers. You must be creditworthy. A P2P loan is very much like a personal loan through a bank except you may encounter slightly higher interest rates and you could get a longer term for the loan. You usually pay an origination fee of 1% to 5% of the principal of your loan. P2P loans can accommodate you if your credit has some blemishes on it.
  4. Credit Card Loan: You can always use a credit card for holiday purchases, but the interest rates are higher than the other options. If you pay off the charges at the end of the first month, this is an acceptable option. If you allow yourself to carry the debt, credit card debt can get you into financial trouble quickly.

Key Takeaways

  • Holiday loans are short-term personal loans to cover holiday expenses if you lack a dedicated savings account.
  • These accounts are good for people who tend to go overboard at holiday time.
  • Interest rates will be higher than a secured loan, but less than a credit card.
  • Don't borrow more than you need, and pay it back promptly.