We all know how holiday spending adds up. All those gift-wrapped boxes under the tree and tantalizing bumps in the stocking match one-to-one with a line on your expense sheet. Last year Americans on average spent nearly $1,000 each on gifts, parties, season's eatings, decorations, and other holiday expenses. With holiday retail projected to rebound a bit in the coming months, that number may rise in 2021.
Small personal loans don’t jump immediately to mind as a classic holiday item, but they might be your best bet to offset holiday expenses this year. A seasonal shopping personal loan is a clean-cut way to cover the gift list for heavy-duty holiday shoppers. And remember that your shopping list this time of year is often a lot longer than you imagine. Hosting Thanksgiving? Stalking Black Friday or Cyber Monday deals? It can get pricey, and a bit overwhelming!
We put together this quick primer for people interested in Christmas loans for holiday shopping. Read on to better understand the benefits of using a personal loan for the holidays, what to consider when shopping for a holiday loan, and why it might save you money in the long run.
Benefits of using a personal loan for holiday shopping
Naturally, a lot of us rely on our credit card (or cards, more likely), to spread around the holiday spending and avoid thinking about it too much until later. On the plus side, this is practically effortless, and as long as you pay your bills on time, this may improve your credit score. On the flip side, you are basically paying for the holidays with credit card debt, which often means you'll pay more money overall.
With a holiday loan from a lender like a local bank or credit union, however, you’ll likely get a better interest rate and a clearer path to debt-free status. You’ll also likely save some money in the long run. And just like paying down your credit card bill on time, regularly hitting your holiday loan repayments will benefit your credit score and contribute positively to your credit history file.
Using a personal loan for holiday shopping instead of a credit card can benefit you in less obvious ways, too. Sneaky automatic payments that you turn on and then forget about can land you in high credit card debt. An overreliance on your credit card via automatic payment can easily lead to bad credit if you’re not careful. The same logic applies when a credit card is the default payment method at your go-to place for online shopping. Just a few clicks can max you out if you’re not paying attention.
When you take out a personal loan, the money you have available to spend is limited. Once your loan is approved, it’s deposited in a savings account or checking account, from which you can happily do your holiday shopping. Using a loan instead of your credit card can be considered a safeguard against accidentally overspending. Just make sure to double check the payment method when online shopping.
(Pro tip: Scammers love targeting holiday shoppers like you. Beware of suspicious fees, and check out this list of personal loan scams and traps to avoid.)
Cost of a personal loan for holiday shopping
You might not think about it like this, but a personal loan is a product. Like any product, it costs money. It just doesn’t have an obvious price tag on it.
What is the typical amount of a personal loan for holiday shopping? What is the typical interest rate on a personal loan for holiday shopping, and how long would you have to pay it off? Well, that all depends obviously, but let’s take a simple example.
Above we saw that the average American dropped about a thousand bucks last holiday season. But your best friend just had twins, your college roommate just got married, and your partner is strongly hinting that they want a puppy for Christmas. Better make it $2,000 — a little more than you can comfortably take out of your savings account or run through your debit card.
Rather than putting a matching pair of plaid Baby Björns, a fancy multi-cooker, and a down payment for Fido on your Visa, you opt to borrow smarter by taking out a short-term loan for $2,000. You’re confident you can pay it off in a year or less. Your desired repayment term (12 months), along with an interest rate determined by your credit history, will decide what your monthly payment is.
But the important point to keep in mind is that the interest rate you’ll get on a personal loan will probably be a lot better than the interest rate on your credit card.
As we enter the holiday season, the average credit card interest rate is 16.16%; the average personal loan interest rate, meanwhile, hovers at around 10%, and the better your credit score, the lower that number goes. While there are other numbers to crunch when you want to calculate loan payments, you don’t need to be a math genius to realize that lower interest rates = less money spent overall.
Bottom line: The “cost” of your loan will be the amount of interest you pay on top of the original amount borrowed (the principal). You take out that $2,000 loan and agree to pay it back over the course of a year, at 10% interest. By next Christmas, you’re making your last payment; the total amount of money out of your pocket over 12 months of loan repayments totals $2,110. So the cost of your loan is $110 — lower than it would be if you were paying that same amount back spread across relatively high interest credit card bills.
What to consider when shopping for a holiday loan
TLDR: If you are anticipating a big end-of-year shopping spree (and that includes self-care splurges!), an unsecured personal loan may be a better call than your credit card for all your holiday shopping needs. (Even the ones that are really just wants.)
The Kasasa Loan® gives you total control over all of the variables we just covered, and can help you borrow smarter this holiday season instead of racking up more high-interest credit card debt. Our unique Take-Back® feature lets you reclaim extra money you’ve already paid toward your loan, giving you access to funds when you need them most. And if you never end up needing them, you get out of debt faster and save on interest. Just the thing you need for super-last-minute stocking stuffers!
Discover more about the Smartest Way to Borrow in our previous blog post, "How to get a personal loan for the holidays."