Christmas Loans: The Coal in Your Financial Stocking

These festive-sounding loans could leave you with a lot of debt. It's better to create a budget and start saving.

Amrita JayakumarJune 17, 2020
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When the holidays approach, you may start worrying about how to pay for it all: the shiny new ornaments, the photos with Santa, the plane ticket home. And all those Christmas gifts.

You may be tempted by an offer in the mail or your inbox labeled “Christmas loans.” Don’t fall for it. This financial product surfaces every holiday season, and it’s a bad deal. Here’s why.

It could be a payday loan

A Google search for “Christmas loans” will return hundreds of websites promising you fast cash. But many Christmas loans are simply payday loans in festive disguise.

These lenders typically don’t check your credit, and they promise to send you money within 24 hours.

Many Christmas loans are simply payday loans in festive disguise.

The catch? Your interest rate will be well into the triple digits, and you’ll have to pay back all the money, plus interest, in a few weeks or months.

For example, a $500 loan due in two weeks that costs $15 for every $100 borrowed equals an annual percentage rate of 390%, typical of payday loans.

You’ll also have to let the lender access your bank account to collect payments, leaving you vulnerable to costly overdraft fees if you don’t have the funds in your account.

Online Christmas loans aren't cheap

If your credit is average, even non-payday loans aren’t a cheap option.

Christmas loans from online lenders are actually plain old unsecured personal loans by another name. The interest rate you qualify for depends on your credit score, credit history, debt and income.

Low advertised rates are attractive. But that doesn’t mean you'll get that rate.

There are two forms of financing you might encounter — personal loans meant for large, one-time expenses like a kitchen remodel or a wedding, and point-of-sale financing, designed for smaller purchases by those who are new to credit and cannot qualify for credit cards.

The lowest rates advertised by companies — which can go as low as 0% for point-of-sale financing — are attractive. But that doesn’t mean you will get a loan at that rate.

For large personal loans from online lenders such as LendingClub and SoFi, borrowers with average credit scores (630 to 689) can expect a rate close to 22%, and those with bad credit scores (629 and below) can expect 27% or more, according to NerdWallet’s personal loan calculator. A $1,000 loan, due in two years at an APR of 20%, will cost you $221.50 in interest.

Point-of-sale financing companies like Affirm and Klarna have rates ranging between 0% and 30%.

Unlike the ugly sweater your aunt gave you, this loan can’t be hidden away. You could be stuck paying off this Christmas when the holidays roll around next year — and maybe even the year after that. Personal loan terms typically span two to five years, while point-of-sale companies offer repayment periods of less than a year.

If you decide to borrow, NerdWallet recommends comparing loans to find the best rate for you. Click the button below to see estimated rates from multiple lenders on NerdWallet.

Alternatives to Christmas loans

It’s not too late to pull together an affordable holiday. Start by creating a budget. Use NerdWallet’s guide to building a budget to plan how much you can afford to spend on food, gifts, travel and decorations. Stick to the budget, even if it means no stocking stuffers or office holiday party. It may mean skipping big gifts altogether.

Yes, you can pull together an affordable holiday. Start with a budget.

Then, as soon as the holiday dust settles, start saving for next year.

If you are building up your credit, we like credit-builder loans for this purpose. You “borrow” money, but the lender tucks that amount away while you make payments. Once the loan is repaid, you get the money and have a year of on-time payments on your record to improve your credit.

In the end, the best gift you can give yourself is a debt-free Christmas.

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