Markets

Should You Take Out a Personal Loan to Cover Your Holiday Expenses?

A woman baking cookies in her kitchen with a Christmas tree in the background.

Image source: Getty Images

Many people pledge to save for the holidays in advance, only to find that they're none the richer by the time late November rolls around and those expenses start popping up. If you're not sure how you'll swing your holiday spending this year, you may be thinking of taking out a personal loan. With a personal loan, you can borrow money for any reason, and you'll usually qualify based on your credit score coupled with your ability to repay your debt (meaning you'll need an income source, like a job, for a lender to feel comfortable loaning you money).

Personal loans are usually preferable to credit cards for a couple of reasons. First, personal loans tend to charge a lot less interest, which makes your debt less costly. Second, a personal loan won't hurt your credit score if you make your payments on time. A high credit card balance, on the other hand, could damage your score by driving up your credit utilization ratio.

But while a personal loan might seem like a good solution for covering your holiday expenses, it still pays to think twice before taking one out.

The danger of debt

Some people have no choice but to incur debt when emergency expenses arise. If your roof starts leaking and you don't have the $1,200 to pay for a repair crew, a personal loan makes sense, because you can’t put off that sort of expense. Similarly, if your car breaks down and you need it to get to work, it pays to get a personal loan to cover the repairs if you don't have the money in savings.

But taking out a personal loan for non-essential expenses is a poor idea. So if you're finding yourself cash-strapped as the holidays near, you're better off avoiding the loan and instead altering your plans. If you take on debt to pay for gifts, travel, decorations, and cards, you'll only end up paying more for those items in the form of interest, even if that interest is less than what you'd pay on a credit card. Also, if you take out a personal loan for holiday spending, you'll risk falling behind on your payments, which could seriously damage your credit score. If it does, and you then need to borrow money for a true emergency, that option may be off the table.

A better approach to the holidays

The best way to cover your holiday expenses is to save for them in advance. If you've already missed the boat on that, then your next best bet is to trim your spending in a meaningful way.

If you normally spend $600 on gifts for friends and family, cut that down to $60 by giving out batches of from-the-heart homemade treats instead. Or explain to the important people in your life that you can't give presents this year because it would put a strain on your finances.

Meanwhile, you can downgrade your decorations or, if you have kids, enlist their help in making your home look festive. Outdoor lighting can be costly, and it can cause your electric bills to skyrocket, but that doesn't mean you can't adorn your living room with tinsel and garlands.

Finally, if you're in the habit of sending out dozens of custom holiday cards, swap those for an email blast. It's an easy way to reach everyone you want to share good wishes with, and it won't cost you a dime.

Though personal loans make it easy to borrow money affordably, you shouldn't take one out for just any reason. If an emergency arises, a personal loan is a reasonable choice, but don't get one for expenses that you can avoid altogether.

Our Picks of the Best Personal Loans for 2020

We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More