A Beginner's Guide to Obtaining a Holiday Loan

Holiday Loans: Steps to Apply for a Holiday Loan Quickly

The holiday season sneaks up on you, leaving your wallet empty for gifts and parties. If you need money for Christmas-related expenses like presents, you may qualify for an unsecured personal loan called a holiday loan. This cash might help cover additional expenditures, such as food and travel if you are unable to work over the Christmas season. 

Holiday loans may be tempting to fill budget gaps, but they may worsen your financial situation. Explore holiday loan options first, as they may sometimes be beneficial. In today's blog, we will answer the question: Is it good to get a holiday loan?

Key Highlights

  1. Personal loans like holiday loans are great for those unexpected seasonal expenses. 

  2. Holiday loans are a hassle-free way to borrow money without collateral, just like any other personal loan. 

  3. Look into other options to help you borrow less money for the holidays or even skip getting a loan altogether.

What is a Holiday Loan? 

A holiday loan is a special personal loan for all your holiday needs. Financial institutions such as credit unions, banks, and online lenders offer these holiday loans. 

Holiday loans often include:

  1. A set interest rate.

  2. An agreed-upon loan length.

  3. A predictable payback schedule might last anywhere from six months to five years. 

The monthly payment is also fixed. Lenders may ask for an upfront origination fee to cover loan creation costs. You can get up to $5,000 from lenders for holiday shopping or expenses like meals and travel.

What credit score do you need for a Holiday Loan? 

Lenders that provide holiday loans usually look at your income, debt-to-income ratio, credit history, and credit score to see whether you qualify. Although each lender has different minimal criteria for each of these elements, our suggestions include:

  1. 670 is the minimum credit score. A minimum credit score of 670 will increase your likelihood of being approved. However, we advise a minimum score of 720 if you wish to get the best terms.

  2. Reliable and consistent monthly income. Lenders may have different minimum income requirements, and others may not have any. But to prove you can afford your monthly payments, you must have a reliable source of income.

  3. DTI percentage of under 36%. Although certain lenders may accept an exceptionally qualified candidate with a ratio as high as 50%, your best bet is to strive for a DTI of less than 36% to increase your chances of being approved.

Pros and Cons of Holiday Loan 

While they might only be ideal for some, holiday loans could be helpful in some situations.

Pros

  1. What you require may be borrowed. You may borrow as much as you need and avoid paying interest on a more-than-required loan because holiday loans are often low-dollar.
  2. Reduced interest rates. Interest rates for holiday loans are usually lower than those on standard unsecured personal loans.
  3. Short terms. Repayment periods for holiday loans are typically 12 months. If you pay off your loan early, you won't incur additional costs because many lenders don't impose prepayment penalties.

Cons

  • You'll spend more money than you spent over the holidays. Borrowing for holiday festivities may bring extra interest payments. The interest rate on a credit card may be much higher than on a personal loan.
  • It might lower your credit score. Your credit score may suffer, and it may become more difficult for you to get financing if you make late payments, skip payments, or default on your loan.

What can holiday loans be used for? 

  • Loans for holidays are used for more than just buying presents. The coverage might extend to any unforeseen costs incurred in November and December. 
  • Shopping for gifts. A holiday loan might be helpful if you need more cash to purchase gifts for everyone on your list. 
  • Travel. Holiday loans can help with larger travel costs like accommodations, petrol, and airline tickets.  
  • Additional expenses. Most lenders won't impose conditions on how you utilize the funds. The funds from a holiday loan can be used for nearly anything, much like less specialized personal loans. 

Factors to consider while applying for a Holiday Loan

Before applying, understand the lender's repayment conditions, costs, and rate range.  

1. Interest Rates

Borrowing money incurs a fee known as interest. As the rate rises, so does the price. You might expect a cheaper payment if the rate is lower. Holiday loans and other personal loans have lower interest rates than credit cards. A good lender will provide a reduced APR if your credit score is high. 

Lenders have their unique ways of setting rates. Certain credit cards offer a delightful 0% APR purchase period. This means that even if you qualify for a holiday loan with low rates, you might spend less overall.

2. Fees

Lenders add fees to the mix when you borrow, along with interest. Watch out for origination fees, late payment fees, and prepayment penalties. 

  1. Origination fee: The origination fee, a small percentage of your borrowed amount, joins your balance upon loan funding. Borrowing $1,000 plus a 3% origination charge will result in an initial loan total of $1,030, even though you will only get $1,000. 

  2. Late fee: Avoid late fees by making your scheduled payment on time. But beware, they can be quite costly if you're not cautious. Never miss a beat - sign up for autopay or mark your calendar! 

  3. Prepayment penalty: The prepayment penalty exists to be imposed when you attempt to pay extra or settle your loan early. Verify with your lender to see if they impose this fee, as it is not common for personal loans. 

3. Repayment Term

The length of time you have to pay back a loan, provided you make the required minimum payments, is known as the loan duration. Holiday loans typically last six to 12 months. Loan repayment duration impacts overall expenses. Time is money, my friend. Even with equal interest rates, the longer you take to settle a loan, the more interest will sneak up on you. Long-term loans = more cost than short-term loans. Try a personal loan calculator to predict your payments using interest rates and loan terms. 

Top 5 Alternatives of Holiday Loan 

Here are the top 5 alternatives for Holiday Loans:

1. Personal Line of Credit

The first alternative to a holiday loan is a personal line of credit. A personal line of credit lets you take out regular loans for some time. Utilizing a line of credit instead of taking out a loan would allow you to conserve money for the holidays by just spending what you have available. 

2. P2P Loans

Peer-to-peer (P2P) loans are also another alternative to a holiday loan. It can be acquired from businesses or other consumers through online marketplaces. While credit card interest rates may be greater, they may also be cheaper than vacation loans. It might be simpler for borrowers with limited credit histories to get accepted for a P2P loan than for a bank loan.

3. Credit Card

Taking advantage of a special APR offer makes using a credit card rather than a holiday loan a viable option. For example, if your credit card has a long 0% APR period, you might pay off the balance over time without paying interest.

4. Buy Now, Pay Later (BNPL)

 With BNPL finance, you may pay for items in the set, short-term installments, often without having your credit checked beforehand or affected while you return the loan. BNPL is a payment option that many merchants provide. It lets you pay off your amount through either monthly or bi-monthly payments.

5. Use Credit Card Points

The last but not the least alternative to a holiday loan is using your credit card points. If your credit card provides extra perks, you can redeem credit points for purchases or have them put into your bank account. Exchange awards for gift cards to maximize them. These cards are good for gifting and retail purchases.

Final words

Holiday loans boost your gift-giving budget. Borrowing money when you need help to afford gifts is a bad idea. True friends wouldn't want you to go into debt for Christmas gifts. You should find alternative ways to communicate your concerns. 

If a holiday loan is ideal, consider a personal loan. Applying with various lenders is faster with similar documentation. A longer loan duration will allow you to spread the cost across smaller monthly installments. 

FAQs

Why are holiday loans used?

Holiday loans are unsecured personal loans that can be used for cash shortages, gifts, travel, and parties. Annual percentage rates for $1,000–$100,000 loans range from 6% to 36%.

Are holiday loans worthwhile?

Holiday loans are terrible debts despite their regular and long-term payments. According to Equifax, bad debt doesn't pay off and might worsen your finances.

How do personal and holiday loans differ?

Many credit unions and banks provide Christmas loans from $500 to $2,500, with some lending $5,000. Holiday loans often have shorter payback durations. Some personal loans offer years to repay, whereas holiday loans only last a few months to a year.

What's the minimum credit score for a holiday loan?

You'll need a credit score of at least 670 and a stable income to get a holiday loan. Meeting the minimum requirements could make securing a holiday loan a breeze. Need a loan but have a credit score below 670? Check out personal loans for fair credit or bad credit loans.

Suggested Articles:

  1. How to get a Personal Loan

  2. How to refinance Personal Loan

  3. Home Equity Loans

06 Dec, 2023

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