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Holiday Loans
Credit Cards
Here's a Holiday Example
Keep This In Mind
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The holiday season can get expensive, no doubt about it. If you’re like many people, you may need a little financial boost to help make it through to the new year. If so, there’s no shame in that.
Holiday loans and credit cards are two of the most common solutions that make gift-giving and seasonal travel a little easier to enjoy.
Holiday Loans
Around this time every year, many financial institutions offer some version of a holiday loan. These are personal loans (often with a special low rate) offered to help people cover common seasonal expenses.
When you take out a holiday loan, you’ll receive a lump sum of money that you’ll pay back — with interest — over a set term.
Why People Choose Holiday Loans
One of the main benefits of holiday loans is that you can’t spend more than the amount you’ve financed. If you have a $1,000 holiday loan, you have $1,000 to spend. Simple as that.
Additionally, paying back a holiday loan is more structured than paying off a credit card. You have set monthly payments, and that amount usually stays the same until the account is paid off.
Lastly, holiday loans tend to have lower interest rates than credit cards, and in some cases, taking out a loan could save you money compared to financing with a card.
Something To Consider
When you pay off the loan, the account will be closed, which may cause your credit score to dip temporarily. But don’t worry. In the long run, responsibly managing and repaying a loan has a net positive impact on your credit score.
Credit Cards
Credit cards are probably more familiar. They’re a type of revolving credit that you can pay off each month. Like personal loans, they charge interest — but typically only if you carry a balance from month to month.
Why People Choose Credit Cards
Credit cards are more open-ended than personal loans, so while you do have a spending limit, the actual amount you spend can vary. Since you have a credit limit instead of a loan amount, you aren’t locked into borrowing a set amount.
If you pay your balance in full each month, you can actually avoid paying interest. That can save you a ton of money in the long run and positively impact your credit score.
Lastly, the benefits of credit cards extend long after the holidays are over. When you pay off your balance, the account doesn’t close. You can use it again when you need it, as long as you keep the account open. Plus, many credit cards offer rewards like cash back or travel miles for dollars spent, which can help your money stretch further.
Something To Consider
Credit cards typically have higher interest rates than holiday loans. If you carry a balance for several months, you may end up paying more in interest with a credit card than you would have if you’d taken out a personal loan.
Additionally, because the amount you’re borrowing is open-ended, that can increase the temptation to overspend.
Here’s a Holiday Example
Clara and Buddy are both choosing between a holiday loan and a credit card.
Clara needs $2,000 to buy plane tickets for her whole family. She can’t afford to repay that right away and will need to make payments in installments for several months.
A holiday loan would be the better option, as it would give her a structured repayment schedule and a lower interest rate than if she opened a credit card.
Buddy won’t receive his next paycheck until after Christmas, and he hasn’t finished his holiday shopping yet. He wants to borrow $500 to purchase a few last-minute gifts, and he’ll be able to repay that amount as soon as he gets paid.
Buddy would be better off with a credit card. If he pays his balance in full when his paycheck lands, he won’t be charged any interest. If he’d chosen a holiday loan, he’d be on the hook for interest even if he were able to repay the principal early.
Keep This in Mind
Credit cards and holiday loans can be wonderful tools to help you get through the holiday season, as long as you use them responsibly.
If you’re borrowing money that you know you can pay back, that’s one thing. But if you’re using debt to overspend without any strategy for paying it back, it may be worth talking with one of our financial advisors. We can help you assess your current situation and find the best solution for the holidays and for the rest of the year as well.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual.
