Should you finance your festivities? A look at holiday loans

Planning ahead for the holidays can make everything go smoother. That includes figuring out how to smooth out your finances when the holidays often come with a little extra cost.

With the help of a holiday loan, it's possible to plan for expected—and unexpected—expenses. Let's take a look at how a holiday loan can help you plan your end-of-the-year budget.

What is a holiday loan?

A holiday loan is a type of personal loan. It's usually an unsecured loan, meaning you don't need to own something valuable that you can borrow against. You get all of the loan funds in one lump sum when you get your loan, and you’ll make a monthly payment until the loan is paid off.

During the holiday season, a loan can help smooth out your finances and cover costs related to buying gifts, entertaining, and the other expenses that often come with this time of year.

Some of the items you can use a holiday loan for include:

• Gifts for loved ones

• Food and drink for entertaining and holiday parties

• Holiday decorations

• Travel if you're leaving town during the holiday season

Is a holiday loan ever a good idea?

Borrowing for the holidays is tricky because the holidays pass by in a few weeks, but the debt can last a long time. That said, it’s not inherently a bad thing to borrow for the holidays if the loan is part of a good financial plan. Here are some scenarios when it might be okay to consider taking a holiday loan.  

• When you can pay it off before the next holiday season: Look for a loan with no prepayment penalty so you can pay it off in under a year. Double-check that you can afford the payments to get rid of the debt faster.

• When you can save money compared to other options: Personal loans often have lower rates than credit cards, so you might save on interest if you choose a holiday loan over paying with credit cards.

• When you can make use of extra funds: If you happen to get a personal loan for another purpose and have money left over, you might use it for holiday costs.

With a plan to pay back the holiday loan early, you can keep working toward your other goals after the holiday season ends.

3 reasons a holiday loan can be a good option

Sometimes, financing your holiday expenses with a holiday loan makes sense. Here are some advantages:

• Smooth your holiday cash flow: It's common to experience budget strain during the holiday season. Monthly payments year-round can help you avoid a spike in expenses during the holidays.

• Lower interest rate: Personal loans tend to have lower interest rates than credit cards.

• Better for your credit: A personal loan can also be easier on your credit score than using a credit card for holiday expenses because personal loans don’t hurt your credit utilization ratio. Your utilization ratio is how much credit card debt you have compared to your credit limits.

2 reasons you might want to avoid borrowing for the holidays

It's not always the best idea to get a holiday loan. Before you move forward with a loan application, here are some drawbacks to borrowing for the holidays:

• Interest costs: Even with a lower interest rate, a holiday loan still costs money. Borrowing for the holidays adds to the overall expense. Instead of making a monthly loan payment, consider putting that amount into a holiday savings account all year round instead.

• Remain in debt long past the holidays: Most personal loans have a repayment term of two to five years. If you’re still paying for last year’s holiday expenses, how will you afford this year’s holiday expenses? If you can’t pay off the loan in under a year, a holiday loan might not be a good choice. 

How to apply for a holiday loan

If you decide that your situation is right for a holiday loan, you’ll need to provide personal and financial information. The lender will also check your credit to determine your eligibility for certain loan amounts and interest rates.

Once you're approved, you can receive the loan money as early as the following business day. This can be helpful as you might need the money quickly to cover your holiday expenses.

4 alternatives to holiday loans

If a holiday loan isn’t the best fit for your situation, here are a few other strategies you can try:

• Save for holiday expenses: Create a separate savings account for holiday costs. Set aside money each month. By the time the holidays come, you'll have extra money to cover the costs.

• Increase your income: Look for ways to earn more money and set aside that income for your holiday expenses. 

• Use cash back and points: Shopping apps and cash back apps can help you earn points and cash back. Set aside your rewards and use them for holiday costs at the end of the year.

• Buy gifts throughout the year: Look for sales on gift items year-round. That way, you aren't making all your purchases during the holiday season. Plus, you might get some good deals.