Should you finance your festivities? A look at holiday loans

A special trip or a season full of celebrations is something to get excited about. And they'll likely be much more exciting if you know exactly how to pay for them without straining your budget.

A loan for vacation or holiday expenses could be one way to do that—but it's not right for everyone or every situation. A holiday loan works best when you're comfortable with the extra costs and have a clear payoff plan.

What is a holiday loan?

A holiday loan is a personal loan that you use to cover the costs of the holidays or a vacation. It's typically an unsecured loan, meaning you don't need collateral or something valuable to back up the loan. You might also hear it called a vacation loan or travel loan, which is the same personal loan, just used for trip costs.

With a personal loan, you get all of the loan funds in one lump sum. Then, you'll make monthly payments until you pay off the loan.

During the holiday season, a loan could help smooth out your finances and cover expenses you'd rather not skip. Some of the things you could use a holiday loan for include:

• Gifts for loved ones

• Food and drink for entertaining and holiday parties

• Holiday decorations

• Travel, flights, and hotels for a trip

Is a holiday loan ever a good idea?

Borrowing for the holidays is tricky. The holidays pass quickly, but the debt can last much longer. Still, a loan isn't inherently a bad choice when it's part of a good financial plan.

A few scenarios that may make a holiday loan worth considering:

• When you can pay it off before the next holiday season: Find 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 interest 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.

Potential pros of a holiday loan

Sometimes, financing your expenses with a holiday loan could make more sense than the alternatives. Here are some potential advantages:

• Smoother cash flow: Budget strain is common during the holiday season. Monthly payments year-round could help you avoid a spike in expenses during the holidays.

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

• No credit utilization spike: A personal loan could be easier on your credit score than using a credit card for holiday expenses, because personal loans don't affect your credit utilization the way credit card balances do. Your utilization ratio is how much of your available credit you use compared to your credit limit.

Reasons you might want to avoid borrowing for the holidays

A holiday loan is rarely the best choice. 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 than a credit card, a holiday loan can still cost quite a bit of money and adds to the overall expense. Instead of making a monthly loan payment, consider putting that amount into a holiday savings account all year round.

• Loan fees: Many lenders charge origination fees for a personal loan, which could add an extra 2%, 5%, or even 10% to the total cost of your loan—and the total cost of your holiday or vacation.

• 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 loan for vacation or holiday costs

If a holiday loan fits your situation, the application process is straightforward. Here are the general steps you may need to follow to apply:

• Gather your documents. Collect proof of income and a government-issued ID before you start, so you can complete the application accurately.

• Consider your qualifications. Personal loan requirements vary by lender, but most look at your credit history and score, your income, and your existing debts.

• Prequalify to check your options. Get estimated rates from at least three lenders that use a soft credit inquiry, like Achieve Personal Loans. A soft inquiry won't impact your credit scores.

• Review the offers before you accept. Don't just pick the lowest monthly payment. Check each interest rate, repayment term, monthly payment, and any fees so you understand the full cost.

Once a lender approves you, your loan funds could land in your bank account, so the money is ready for your gifts, travel, or other costs.

Alternatives to holiday loans

A loan for vacation or holiday spending might be one option, but it's worth weighing against the alternatives before you borrow. Here are other strategies you could try:

• Save for holiday expenses: Open 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: Find ways to earn more money, whether it's a seasonal job or year-round side-hustle. Set aside that income for your holiday expenses.

• Apply for a credit card with a 0% APR offer. If you have at least good credit, these offers are plentiful and could give you 0% interest on your holiday purchases for 12 months or more.

• Use cash back and points: Start using a rewards credit card, or check out cash back and rewards apps that help you earn points on everyday spending. Set aside your rewards and use them for holiday costs at the end of the year.

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

A holiday loan is one path, and so is saving ahead or earning a little extra. Whichever you choose, a clear plan helps you enjoy the season and keep moving toward your goals.

Want to see what a holiday loan might look like? Check your estimated rate through Achieve Personal Loans with no impact on your credit scores.