Understanding what is a holiday loan and should you get one will help you maximize the benefits of this type of loan. More so, it will help solve your debt hangover brought about by the holiday season.
In a few months’ time, we’re all going to celebrate the holidays once again. And let’s admit, every holiday, we spend a lot! So much that at times, we find ourselves drowning in debts.
You know, whenever it’s a holiday, it’s like innate in us to spend and make joyful celebrations, and that is not totally wrong. After all, the holidays come once a year. So, why not go all out, right?
But what if you don’t have the means to go all out for a holiday celebration? What if you do not have the budget for it?
Well, that is where holiday loans come in. Holiday loans are designed to either be spent on holiday needs or to pay off your bills after the holidays.
Holidays are exciting times.
In fact, in a report by the National Retail Federation, in 2018, Americans spent an average of $1,007.24 each during the holidays. While some used this much money on holiday decorations, gifts, and other trappings of the season, other people spent money on holiday travels.
It’s probably safe to say, given this figure that people really spend a lot during the holidays. Well, who is to blame? The holidays are the best season in a year!
So, going back to holiday loans, some of you might find it surprising that this type of loan actually exists. Well, yes, it does exist! And yes, this type of loan can definitely help you push for a grand (in your own definition of the term) holiday affair!
But, before anything else, before you even apply for one, it is important to know the basics of what a holiday loan is all about.
Having said that, we are going to share with you some very important points on holiday loans. Particularly the following:
- Definition of a Holiday Loan
- Factors to Consider When Getting a Holiday Loan
- Uses of a Holiday Loan
- Most Popular Holiday Loan Options
- How to Get a Holiday Loan
- Pros and Cons of Holiday Loans
- Alternatives to a Holiday Loan
DEFINITION OF A HOLIDAY LOAN
According to U.S. News, holiday loans are “personal loans that you can use to finance year-end holiday expenses, such as gifts, decorations and parties.”
Sometimes also called “Christmas loans,” this type of loan is not a specific type of personal loan.
Usually, lenders allow borrowers to use personal loans for whatever personal expense, which includes holiday-related expenses. For marketing reasons, lenders would use the term “holiday loan” to attract more people to get the loan to pay for expenses incurred or will be incurred during the holidays.
Like any other personal loans out there, holiday loans allow you to borrow money easily and quickly. Holiday loans, just like any other personal loans are usually unsecured loans, which means, it does not need collateral.
To avoid confusion, take note that holiday loans are different from payday loans as well as cash advance loans.
When getting or applying for a holiday loan, it is important to know that some holiday loans may have higher interest rates than secured loans. Well, that is for obvious reasons. Since it’s an unsecured loan, it means, the lender has no car or house or any property to take from you should you default on the loan.
Furthermore, holiday loans do usually have a fixed rate, which means the rate does not change during the whole duration of the loan. Also, the loan is generally paid off in monthly installments.
Since holiday loans are basically personal loans, we are sharing with you a personal loan 101 by MoneyCoach, which we find really helpful and informative. Click the play button below to watch the whole thing:
FACTORS TO CONSIDER WHEN GETTING A HOLIDAY LOAN
Now that you already know what a holiday loan is all about, it’s time to look into the factors you need to consider before applying for a holiday loan.
It’s basically like answering what is a holiday loan and should you get one. As a borrower, it is important that you look into this. That way, you also get to gauge, to decipher if you really need or if you should really get one.
Alright, so much for that. Here now are some of the factors you need to consider before hitting the apply holiday loan button:
Pretty much the same when you are applying for other types of loans. First thing first, make sure to look into the loan’s interest rate.
The interest rate refers to the cost of borrowing that money from the lender, which could be a bank, a credit union, or an online lender.
The rule is basically just the same when it comes to the interest — the higher the interest rate is, the more you will have to pay over the course of the loan. Meanwhile, the lower the interest rate, the less time you have to pay off your debt.
Also, a loan’s interest rate usually impacts the size or the cost of the monthly payment. Thus, borrowers like you (and us, too) should keep it in mind all the more before applying for a holiday loan (or any forms of loan for that matter).
As compared to the rates you pay on a credit card, generally speaking, the rates for holiday loans are usually lower. The holiday loan rates from credit unions, for instance, range from 7.99 percent to 13.99 percent (APR). In contrast, the average credit card APR is around 17.5 percent based on Bankrate.
Another factor that you need to take into consideration before applying for a holiday loan is the fees that lenders charge.
A lot of loans out there charge fees that add up to the overall cost of the loan. Although technically speaking, borrowing money is almost never free, as a borrower, you would like to go for a deal that offers you fewer fees or no fees at all (if possible).
There are so many types of fees that lenders charge borrowers for borrowing money. One of them is the origination fee. This fee refers to a percentage of the total amount that you borrow. It is added to your balance once the loan is already funded.
Apart from the origination fee, some lenders might also charge you with application fees, which are charged upon application for a loan. Another common fee is the early repayment penalty, which is charged to the borrower when he or she pays the loan off ahead of the supposed schedule.
Again, before you get excited about getting a holiday loan, make sure to know all these. Make time to check the fees so as not to get surprised once the lender charges you for it.
Another factor to consider is the loan’s repayment term. The word “term” basically refers to the length of time it will take for a borrower to pay the loan back if you follow the minimum payment schedule required.
Most holiday loans in the country have a loan term that ranges from six to 12 months.
As mentioned earlier, the rule when it comes to paying off loans is simple — the longer you pay it back, the lower your monthly payment will be. Meanwhile, the shorter the term of the loan, the higher the monthly payments will be. It’s important to check both options so you can decide which is more attainable for you.
Another important thing that you should know as a borrower is that the term of a loan also has an impact on the interest rate. Normally, longer-term loans are riskier as compared to short-term loans. Wondering why? Well, it’s simply because they leave more time for you to experience financial emergencies that may hinder you to pay off the loan. It is actually for this reason why loans with longer terms have higher interest rates than shorter-termed ones. It’s all at the risk.
Also, the term of a loan can affect the total cost of the loan. Even if two loans have the same interest rate, the longer the repayment term is, the higher interest will be accrued.
So, we highly recommend that when borrowing money, as much as possible, choose the shorter-term. It’s also less likely for you to get tempted to use the money in paying off the loan for something else. Needless to say, the shorter you have to save money for paying a debt, right?
USES OF A HOLIDAY LOAN
Obviously, as the name suggests, holiday loans are designed for the holidays. However, it does not mean you are restricted to use the money just to buy gifts and decorations for the holidays. You can basically use the loaned amount for different things.
Again, one of the most obvious uses of the funds from a holiday loan is for purchasing gifts. Some of us tend to not have enough money saved for gifts that we end up needing a holiday loan to cover for the cost.
Another is travel. People usually use the time they have during the holidays to travel places. As we know it, travel is not always cheap. Thus, the need for some extra cash on hand. If you need more to pay for travel expenses like airplane tickets or gas, as well as hotels, a holiday loan could definitely help cover for it.
In most cases, lenders do not have any restrictions as to how borrowers are going to use the money. Holiday loans are considered less-specialized loans, which means you can basically use it for almost anything and everything.
MOST POPULAR HOLIDAY LOAN OPTIONS
Have we already answered what is a holiday loan and should you get one?
Well, we are not done yet with information about holiday loans that every borrower must know.
This time around, here are some of the most popular holiday loan options out there:
Personal loans are the most popular type of loan used as a holiday loan. This traditional, unsecured loan comes with a term that lasts between one and five years. Personal loans usually come in a fixed interest rate.
Personal loans do not require collateral. That is why to be able to qualify for a personal loan, you have to have a good credit score.
Of all the types of loans you can use as a holiday loan, a personal loan is probably the best choice given the fact that it’s easy and quick. Needless to say, interest rates are quite reasonable.
To apply for a personal loan, you can opt to go either to a commercial bank or to a credit union. The latter would be more ideal because they only charge interest on the unpaid balance during repayment.
Credit Card Loan
Credit cards are very accessible. If you have one, you can always use it for holiday purchases or other holiday-related expenses.
The downside of using a credit card loan though is that it usually comes with a higher interest rate. However, if you are able to pay off charges by the end of the first month, then this one’s a good option.
With credit card loans, you just have to be responsible for paying off so you can take full advantage of it and make a benefit for you.
Personal Credit Line
You badly need funds to cover your holiday expenses, personal credit line would be ideal for you.
Basically, you are given a line of credit by a financial institution wherein you can withdraw funds from as needed.
Just like personal loans, personal credit lines are also unsecured loans. The only difference is that it does not come with an ending date.
As long as you are repaying the principal amount, you can reuse the funds.
Personal credit lines are usually used for an ongoing project, but, definitely, you can also make use of it to pay for holiday expenses.
To qualify for this type of loan, you got to have a good or excellent credit score.
Peer-to-Peer Loan (P2P)
This type of loan is a relatively new idea in the lending world. However, it has become popular with the holiday loan crowd.
By using a loan platform that is available online, you can borrow from certain individuals and/or investors.
All you need to do is make a loan request on the loan platform, and wait until a number of offers come to you.
To be able to qualify for P2P, you got to be creditworthy, and your credit has to be free from blemishes.
Although P2P seems similar to a personal loan, generally, P2P loans may have slightly higher interest rates. More so, you could get a longer term for the loan.
Often, P2P lenders charge an origination fee of about 1 to 5 percent of the principal of your loan.
HOW TO GET A HOLIDAY LOAN
So, you fully understand now what a holiday loan is all about. How then would you apply for a holiday loan? What’s the process?
Well, all you got to do is…
First, check your credit score through Equifax, Experian, and TransUnion — the most popular credit bureaus in the country. This is to ensure that you can qualify for a holiday loan.
Second, shop around for the best deals on holiday loans. Check banks, credit unions, as well as P2P platforms. Compare loan offers from these platforms.
Third, when making comparisons, make sure to look into the interest rate, fees, APR, as well as any prepayment penalties.
Fourth, ask about the term of the loan. This way you can gauge if you are able to pay off the loan.
Lastly, only apply for the amount that you actually need. Do not borrow money beyond what you actually need or you might end up in trouble paying off the loan.
PROS AND CONS OF HOLIDAY LOANS
Knowing what a holiday loan also means knowing not just the advantages but the disadvantages as well.
Having said that, here are some of the pros and cons we found on holiday loans:
- Holiday loans have fixed payments, which means you know when and how much you have to pay every time for the whole duration of the loan.
- Holiday loans have a fixed term, which means you can choose either to repay long-term or short-term.
- Some lenders offer payment holidays, which means you can miss repayments for a month or two without having to worry about incurring penalties.
- Since holiday loans are unsecured, they tend to have higher costs. It tends to get even higher cost if you have a poor credit score.
- Late payments mean being charged — sometimes too much that it could get you further into debt plus damaging your credit score.
ALTERNATIVES TO A HOLIDAY LOAN
Assuming you have done your best to get a holiday loan but you were not approved because of having a bad credit, what to do then to ensure you have enough to cover for your holiday expenses?
Well, we’ve got here some alternatives. This includes:
- Save ahead of time. – Nothing beats saving money ahead of time. It doesn’t matter if the amount is big or small. What matters is, you save something for the holidays. It’s actually a good alternative as it will save you from loaning money and paying off interests on top of the amount borrowed.
- Make homemade gifts. – Bake pastries, paint, whatever it is that you are good at. Do something out of your own expertise and give them as gifts. We bet you, your loved ones will surely appreciate and love your gifts.
- Spend only on essentials and within your means. – One of the reasons we spend so much on holidays is that sometimes we spend even on non-essential things. For instance, instead of buying new decorations, re-use whatever you have. Instead of planning for holiday travel to another country, plan a trip somewhere near and within budget.
You see, there are so many other alternatives to avoid spending a lot during the holidays. It’s just about sitting down and listing down what truly matters. We bet you’ll be surprised knowing you do not need a holiday loan at all.
FINAL THOUGHTS ON WHAT IS A HOLIDAY LOAN AND SHOULD YOU GET ONE
A holiday loan is a loan, which means, borrowed money. Borrowing money means, paying if off with corresponding fees and interests. So, before you even get one, make sure you fully understand what you are getting into, and that you are sure in yourself that you can pay it off on the agreed time.
So, have you thought about getting a holiday loan this year?