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With Americans expected to spend almost $1,000 this holiday year, many banks and credit unions are advertising holiday loans to help bridge any shortfall in funds. But turning to an unsecured loan to finance your seasonal spending is a quick way to take the cheer out of the holidays.
Despite their themed name, holiday loans are nothing more than small-dollar, unsecured personal loans. Their interest rates range from as low as 4.5% to as high as 15.99%, according to a quick scan of a handful of online offerings. The amount of the loans range from $500 to as much as $5,000, with terms between 12 and 60 months, depending on the financial institution.
Holiday loans are tempting. Some require no credit check for approval, and the lowest rates beat the best ones offered by many credit cards. You also can apply quickly online for a loan.
For all the allure of a holiday loan, however, be wary of signing on the dotted line to get one. “Using any form of debt to pay for discretionary purchases is a bad idea, and this includes using a personal loan to cover holiday shopping expenses,” says Rebecca Wessell, ValuePenguin’s loans analyst. “Getting in the habit of financing consumer purchases, like your holiday gift shopping, is a slippery slope to ending up in debt, or worse, bankruptcy.”
When to Get a Personal Loan
While a personal loan isn’t savvy for your holiday purchases, it’s a smart idea for consolidating multiple debtsinto a single monthly payment with a lower interest rate, says Wessell. Another good reason: “Use a personal loan to get something of value, like taking an educational course for professional development or completing renovations on your home to increase its value,” she says. Consumers with good to excellent credit scores, between 680 and 850, will get the best rates. Lenders also consider how much debt you have relative to your income. If it’s too high, you may not get approved for a personal loan even if you have a great credit score.
Surviving the Holiday Cash Crunch
Here are alternative ways to cut your holiday costs, along with a better way to finance them if you do anticipate a cash crunch.
Get creative with gift-giving: Consider do-it-yourself gifts like baking cookies or knitting scarves instead of store-bought presents, Wessell recommends. Alternatively, ask your family if they want to participate in a Secret Santa, Yankee Swap, White Elephant or other fun, but affordable, gift-giving game, and set a maximum gift value that all can afford. This arrangement helps everyone stick to a predetermined budget and reduces the number of gifts you need to buy.
Maximize rewards: If you have accumulated rewards on your credit cards, use those points to offset your holiday spending in a number of ways. Discover, American Express, Chase and Citi allow their cardholders to pay for their Amazon purchases with points at checkout. You can also buy gift cards—the most requested holiday item—with credit card rewards. Discover will add at least $5 free to each gift card you buy through its Cashback Bonus program. Most credit cards also offer a merchandise catalog, where you can purchase luggage, electronics and jewelry with points.
Avoid temptation: If you’re worried about overspending, take cash—and not your credit card—to the mall. That way, you spend only what you have budgeted. “Also, avoid getting in situations that fuel impulse spending,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling. For instance, skip out on big shopping trips with friends and family, if the excitement might lead to unplanned spending.
Spread the cost: If you’re hosting a holiday party or Christmas dinner this year, ask your guests to contribute a dish or beverages to cut down on expenses you have to shoulder yourself. Stick to low-key but classy decorations such as well-placed twinkling lights, fresh flowers and candles.
Smart credit card moves: If you can’t avoid putting some of your holiday expenses on a credit card, look for one with an introductory 0% APR on new purchases for a limited time. That means you pay no interest on your spending for anywhere between 12 to 18 months. Walmart also offers no-interest financing on its credit card for six or 12 months. You must have good credit, a 700 FICO score or higher, to qualify. It’s also imperative that you set up a feasible plan to pay off your holiday balance before the zero-interest period expires.
This content originally appeared on ValuePenguin.