September 19, 2024

What Are Holiday Loans and How Do They Work?

The holidays are a time for family, joy, and gift-giving. But they can also be a time of huge financial stress.

Holiday finance planning is essential when you’re prepping for one of the most expensive times of the year. And between gifts, travel, and hosting festivities, some households need a little temporary breathing room in their expenses.

Some look at taking out personal loans for the holidays to provide that relief. As the name suggests, a holiday loan helps families cover those short-term costs and manage the season with less stress. Here’s more about holiday loans and when taking one is the right choice for you.

What’s a holiday loan?

Holiday loans, also known as Hanukkah, Kwanzaa, or Christmas loans, are short-term financial products to help individuals and families cover holiday expenses.

When a person accepts one of these loans, they receive a fixed amount – typically one to a few thousand dollars. In unique circumstances, a person can get more, but that means longer repayment terms and higher interest over time. It’s usually best to get lower amounts for the holidays (and only in emergencies) because you don’t want to get stuck repaying for one year’s expenses over a few. If you take out a loan every November or December, you could end up in a cycle of debt.

Typical uses for loans for the holidays

People who take out holiday loans can use them for various expenses, including as a personal loan for vacation — although that's not necessarily recommended. If you have to take out a loan for a trip, it’s best to wait it out until you have the money to avoid deeper debt. Only use loans when you’re 100% sure it’s what you need.

Here are a few common expenses people cover with holiday loans:

Gifts. Gifts for friends and family are the most popular use for holiday loans.
Travel. Whether it's a road trip to visit the grandparents or a flight to see the in-laws, travel expenses like gas, flights, and accommodations add up, and loans help cover them.
Festivities. Some households are big entertainers who need loans to pay for hosting a holiday party or event.

When should you get a holiday loan?

Only take on holiday loans when you absolutely have to. While they can be a handy helping hand, they’re a big commitment. And because short repayment periods are common, it’s best to only take one out when you feel confident in your ability to repay it. Otherwise, your financial situation might get worse.

Here are a few situations where you might find taking out a loan reduces holiday stress:

When you don't have enough available cash to cover gift buying, travel, and other holiday costs
When you’re sure you need the extra cash for a short amount of time and you can repay quickly
When the only alternative is a more expensive form of debt, like credit cards

3 factors to consider when choosing a holiday loan

Here’s what to think about before signing a loan agreement:

1. Interest rates

As with any borrowing product, you pay interest to the lender, and that extra money adds up — even if you pay on time. Many loans are less expensive than alternatives like credit cards, and some providers charge high rates, depending on your creditworthiness and the loan terms. Use a loan calculator to figure out what you can afford.

2. Repayment terms

The payback period can also be a significant factor in deciding whether or not to take out a loan. Ideally, keep your repayment timeline to under a year to avoid needing consecutive holiday loans or paying for gifts bought more than a year ago. Repayment terms can vary widely, but don’t let a lower monthly payment convince you to take on years of debt.

3. Fees

Most lenders charge fees, depending on the loan. Processing or origination fees can cost you a small percentage of the loan with some lenders, and application fees can also add up. Plus, if you miss a payment, you might have to pay a late fee. Weighing those extra dollars can significantly influence where to get a holiday loan.

How do you get a holiday loan?

If you think taking out a loan is the right choice for you, here are nine steps to take:

Check your credit score. Knowing your credit score helps you understand your creditworthiness and chances of qualification. The better your score, the better the terms of the loan you might get.
Determine your loan amount. Only borrow what you need. Determine how much of a loan you're looking to receive by evaluating your upcoming expenses. Making a budget is a good idea because it prevents you from taking out more than you need.
Compare lenders. Shop around and look at potential lenders, from online to in-person options. Select one that best meets your needs and affordability. If you can, do some research on other people’s experiences and find positive reviews.
Prequalify if possible. Many lenders let you check and prequalify for a loan before officially applying for one. Doing this tells you if you qualify and what the terms might be, which means you can easily and quickly opt out if it’s not what you’re looking for.
Gather necessary documents. You may need documentation like proof of income, employment verification, and personal identification. Have them ready just in case.
Submit your application. Once you've chosen a lender, complete and submit the entire loan application.
Review and accept the loan. If approved, it's time to review and sign off on the loan agreement. Have another person read over it just to make sure the terms are solid and you aren’t missing anything.
Receive funds. You should receive the funds within a few business days. Occasionally, deposits occur within the same day.
Repay the loan. Pay the money back according to the agreement.

Alternatives to holiday loans

Holiday loans aren’t for everyone. They’re a big commitment, and sometimes you only need a little extra cash — which means the loan isn’t always worth it. Here are some alternatives:

Save in advance

One of the best ways to avoid loans and the interest they bring is to save for your holiday purchases in advance. To do this, sit down and review your monthly budget earlier in the year. From there, determine how much you can afford to set aside every month and whether it's reasonable for your holiday shopping goals. This way, you have a pot of money to pull from when the holidays roll around.

Personal line of credit

A personal line of credit is like a mix between a loan and a credit card. You can take out money anytime and for any purpose, and the lender only charges interest on what you use. If you think this option might work for you, apply for one early on because the application time can take longer than for holiday loans.

Promotional credit cards

Promotional credit cards can also be a reasonable alternative to holiday loans — if you find a good deal. Look for cards that provide special 0% financing and interest offers, letting you borrow money at no additional cost. Other credit cards also offer sign-up bonuses and purchase rewards.

Think carefully when getting a promotional credit card. The 0% rate is often only temporary, and interest can start accruing after the promotional window expires.

Earned Wage Access apps

Apps like EarnIn give you Earned Wage Access, which means you can use your pay as you earn it instead of waiting days or weeks for your paycheck. Access up to $100/day and up to $750/pay period without interest, mandatory fees, and credit checks. It’s a great option for day-to-day expenses or when you need some extra cash to cover your holiday bills.

Ditch the holiday loan stress

Why stress over holiday expenses when you can access the wages you earn instantly with EarnIn's Cash Out tool? Skip the high interest and mandatory fees holiday loans charge and enjoy financial peace of mind by getting the cash you need at your speed. With Lightning Speed transfers, you can even get your money within minutes.

Download the EarnIn app today and start making the most of your money.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. Restrictions and/or third party fees may apply, for more information please review our Terms of Service available at http://EarnIn.com/TOS.

2. Fees and restrictions apply to use Lightning Speed. Lightning Speed may not be available at all times. See EarnIn Cash Out User Agreement. Expedited Transfer fee paid up front where applicable - see Evolve Deposit Account Agreement.