While shopping for the latest toys and gadgets this holiday season, you may find your inbox or mailbox filled with ads for “Christmas loans” promising quick and easy cash.
But such loans can leave a hole in your wallet long after the gift wrap has been recycled. Here’s why it’s best to avoid so-called Christmas loans.
It might be a payday loan in holiday wrapping
Christmas loans are often simply payday loans, which carry hefty fees that translate into triple-digit interest rates. A $1,000 payday loan, for example, might include a $100 fee, which works out to an annual percentage rate of 261%.
This type of loan requires only a bank account and income for qualification. They have short payback periods — a few weeks or months. Lenders take a postdated check or get access to your bank account to collect payment. If you don’t have enough money to pay back the loan on the due date, you may be hit with overdraft fees.
In contrast, reputable lenders check your credit report to gauge how well you’ve managed borrowing in the past. They also charge APRs below 36%, which financial experts agree is the limit for a loan to be considered affordable.
“Once you start racking up debt [through payday loans], it usually tends to spiral,” says Eric Gabor, a certified financial planner and president of Eagle Grove Advisors in New Jersey.
Your information could be ‘regifted’
Websites that advertise Christmas loans don’t always make the loans themselves. They may instead be aggregators that collect consumers’ personal information and, without conspicuous disclosure, sell it to lending companies.
You may think you’re applying to just one lender when you fill out an online loan application at one of these sites. In reality, your data is sent to multiple lenders. That may result in unwanted marketing emails or calls from companies you’ve never heard of, long after the holidays are over.
You pay now — and for seasons to come
Less toxic borrowing options, including personal loans from banks, credit unions and reputable online lenders, sometimes come with upfront fees and long payback periods. On top of interest, your Christmas loan might include an origination fee of 2% to 5% of the amount borrowed.
Loan terms typically span two to five years, depending on the amount you borrow and your credit profile. You can pay the loan off early if you have the money, and doing so will save on interest.
Taking a loan now means you are taking away money from your future self, says Gabor — money that could be put toward your retirement, an emergency fund or other expenses instead.
A better way to give
Instead of buying items from Christmas wish lists, give a special activity that you can do at little or no cost. Spend the day learning a recipe from Mom or volunteer together at the local food bank, says Gabor.
If you’re set on buying gifts, stretch your dollar as much as you can, he says. Websites like Raise.com or Cashbackmonitor.com can help, by offering discounted gift cards and pointing out cash-back offers. Some credit cards also offer cash back and shopping rewards on holiday purchases.
As soon as the festivities are over, start saving for next year.
You can save and build your credit score at the same time with a credit-builder loan. You “borrow” money from a lender, but the lender deposits your monthly repayments into a savings account.
When the loan is fully repaid as agreed, you get the money back in a lump sum and have a year of on-time payments on your credit report.