Why to Avoid Using Personal Loans for Holiday Shopping

Happy Family Making Christmas Gifts At Home.

When the holidays roll around, you want to spoil your loved ones—and if you have kids, you may feel pressured to fulfill their extensive wishlist. Tracking down the right gifts and finding time to visit family is stressful enough, but gathering enough money to pay for it all can feel downright impossible.

Living within your means is always optimal, but during the holidays, extra expenses may lead you to consider putting gifts on credit cards, or even taking out a personal loan. Some financial institutions even market loans as being ideal for holiday gifts—but that doesn't mean it's a wise idea. Personal loans are usually best used for large, one-off expenses rather than annual costs that are beyond your budget. Read on to decide whether using a personal loan for holiday expenses is right for you.

Holiday Spending Can Strain Budgets

It's no secret that U.S. consumers love to spend money on holiday gifts: In Gallup polls from 2019 and 2020, consumers estimated they'd spend around $850 on holiday gifts, and other surveys show costs exceeding $1,000. It's best to start saving for this annual expense well in advance, but those on tight budgets may find it difficult to stash enough cash.

The pandemic and associated financial stress has further challenged us to save enough for holiday gifts. Experian research in 2020 found that 57% of consumers said they were likely to use credit cards rather than cash when holiday shopping, which is 8 percentage points higher than the previous year. Fewer consumers reported being able to set aside savings for gifts: 65% said in 2019 they'd set aside money for gifts leading up to the holidays, compared with 55% who said the same last year. With the pandemic far from over, this year could also be a struggle and cause some budget-strapped shoppers to turn to loans or other options that allow them to pay off holiday purchases after the holidays are over.

Should You Consider a Personal Loan?

Personal loans are most commonly used for large, one-time expenses such as a wedding, medical procedure, home improvement, debt consolidation, an adoption or a major financial emergency. They're usually unsecured, though some lenders may require collateral if the borrower has bad credit. Once approved, you receive a lump sum of money and repay it monthly in fixed installments. Some personal loans are due within a few months, though most have repayment terms of several years, so you could be paying it back through the next holiday season.

Personal loans also impact your credit score. Repaying a personal loan on time can help build good credit, and if you don't have any other installment loans, this can benefit you by improving your credit mix. However, missing loan payments or making late payments can harm your credit score, and if you already have a significant amount of debt, adding more to your credit report can make you appear risky to lenders.

Before going the route of a personal loan for holiday shopping, consider these alternatives first:

  • Start saving early. Taking out a personal loan means paying it back monthly for months or years to come. Instead, start setting aside some money each month into savings. When the holidays arrive, you'll have shopping money ready to go. This could require creating a budget and cutting back on spending slightly in order to accomplish, but it might be worth it if you don't want to worry about holiday debt in the new year.
  • Get a 0% intro APR credit card. Some credit cards offer introductory periods of 0% interest on purchases, giving the cardholder anywhere from a few months to over a year to carry a balance without paying interest. You could try to qualify for a 0% APR credit card before the holidays and use it for your purchases, then take the next few months to pay it off. Just make sure you pay off the balance in full before your regular APR kicks in, since it could be steep.
  • Get creative. If you'd prefer to avoid borrowing money, find other ways to celebrate the holidays without spending a fortune. For example, make handmade gifts or offer acts of service, such as baking for your loved ones or having an experience together. Making a small donation to a nonprofit you and your family care about or buying a book you love for a friend and making a date to discuss it together could enrich the holidays while also saving you money.

Finding the Best Loan Option

Personal loans are substantial financial commitments, so consider the pros and cons carefully before deciding to go this route. If a personal loan seems like the best solution, do your due diligence before applying:

  • Research your options. Many large banks no longer offer personal loans, but you can often find them at community banks and credit unions, in addition to an ever-growing list of online-only lenders that sometimes offer more lenient borrower criteria. Loan terms, fees, funding options and borrowing requirements can vary significantly by lender. Take the time to read loan reviews, compare products and get a few free quotes before you commit. You may want to start looking at your local credit union or community bank, but make sure to look at online lenders and new products too.
  • Determine how much you need. Personal loans typically have minimums, so you might end up borrowing and owing more than you need. First make a budget and take out the smallest loan possible. For example, the minimum for OneMain Financial loans is $1,500, while Upstart loans start at $1,000, though there may be larger minimums in some states. Be sure to find out the length of the loan term (and whether there are any penalties for paying it off early) so you'll know how long you'll be paying off the loan.
  • Consider loan costs. Determine what interest and fees you might pay. Upstart offers interest rates starting at 4.37% APR for the most creditworthy, which is better than you'll find with most credit cards. OneMain's rates start at 18% APR and increase for those with not-so-great credit.
  • Improve your credit first. The better shape your credit is in, the lower the interest rate and origination fee you'll pay on a personal loan. Higher interest rates increase the cost of your monthly payments, so if possible, take some time to improve your credit before you apply to reduce the costs of a personal loan. If your credit is in excellent shape, you can land a personal loan interest rate lower than with a credit card.
  • Avoid predatory loans. Since traditional personal loans can be challenging to qualify for, some people turn to risky alternatives like payday loans or car title loans. While they're easy to get approved for, these small loans come due quickly and with dangerously high fees, so view them as a last resort.

The Bottom Line

Setting money aside throughout the year for holiday gifts or even using a 0% intro APR credit card to pay off purchases without paying interest can help you avoid months or years of interest costs. But if a loan feels like the best choice for you, numerous online lenders give borrowers even more options, though it's easy to get overwhelmed with so many choices. To narrow things down, consider using Experian CreditMatch™, a free service that matches you with personal loan options tailored to your credit score and borrowing needs.

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