Christmas Loans: How Should You Pay for Your Holiday?

Need extra cash for holiday purchases or unexpected expenses that arise late in the year? Consider a Christmas loan, also called a holiday loan. This financing is a type of personal loan with a short repayment period. It can come in handy when you need funds in a pinch in November and December.

But know what you are getting into before committing to a Christmas loan. Learn how it works, what’s needed to qualify, pros and cons, eligibility requirements, who offers it, and alternatives to consider.

What is a Christmas loan and how does it work?

A Christmas loan is just another word for a personal unsecured loan, which typically only requires your signature and no collateral. Lenders may refer to these loans as “Christmas loans” because they market and offer them around the holiday season. Borrowers who desire extra funds are the target prospects for these loans.

“These loans are designed to help people finance their holiday expenses – from gifts to traveling to food for parties,” says attorney and consumer-finance pro Ben Michael, vice president of operations for Michael & Associates, a law firm.

Christmas loan borrowing limits can vary, from $1,000 to $5,000 or more, depending on the lender, the loan’s terms, and your eligibility.

Advantages and disadvantages of a Christmas loan

On the plus side, Christmas loans are fairly easy to qualify for and obtain if you meet the eligibility requirements (more on that later).

Also, “some holiday loans from banks and credit unions carry lower interest rates than credit cards would charge if you have good credit,” says John Pfisterer, former vice president of finance at Capital One, a bank, and currently CFO at Super Processor, Inc., a payment-processing company.

Christmas loans also commonly come with a predetermined repayment schedule. However, “they [Christmas loans] tend to have fairly short repayment terms – often 36 to 60 months – so you’ll need to repay the funds relatively soon after the holidays,” cautions Michael.

Additionally, holiday loans can come with high fees, including a higher interest rate than you’d be charged for a secured loan, as well as an origination fee – which could raise the total interest you have to pay and the amount you have to borrow, according to Lyle Solomon, an attorney and personal-finance expert with Oak View Law Group. You’ll likely need a higher credit score and proof of solid earnings and employment to qualify, as well.

“Be aware, too, that some holiday loan lenders may ask for collateral, especially if you request a high loan amount. If so, accepting the loan can put you in danger of losing your collateral asset if you can’t keep up with the payments,” Solomon points out.

Be forewarned, too, says Pfisterer of Super Processor: Holiday loans tend to be aggressively marketed by predatory lenders to disadvantaged consumers. That’s why it’s important to choose a Christmas loan lender carefully.

Lastly, note that applying for a Christmas loan could lower your credit score. But if you supply a few pieces of financial information to the lender, the lender may prequalify you for a holiday loan without affecting your credit score.

Good candidates for a Christmas loan

Consumers who lack access to cash or other forms of credit, but who anticipate bigger bills and expenses during the holiday season, are common borrowers of Christmas loans. “Those who need extra cash for the holidays could do much worse than one of these loans. Compared to many credit cards or buy-now, pay-later programs, Christmas loans have much lower overall borrowing costs,” says Michael of Michael & Associates.

Especially if you lack the collateral – such as a home, vehicle, valuables, or personal assets – that a secured loan like a home-equity loan or home-equity line of credit requires, a Christmas loan could be a worthy form of financing. That’s assuming you qualify and plan to repay the loan on time.

“The quick repayment time required on these loans means you’ll probably want to use them to supplement your holiday spending rather than use it to finance your entire holiday budget,” Michael advises.

Where to get a Christmas loan

Banks, credit unions, online lenders, and other financial institutions commonly offer holiday loans, usually between October and December to align with the holiday shopping season.

“If your credit history and income are strong, consider applying with your local bank or credit union before engaging with an alternative lender, which should save you money in the long run,” recommends Pfisterer of Super Processor.

How to qualify for a Christmas loan

To get approved for a holiday loan, aim to have a credit score of 670 or higher.

“I advise a minimum score of 720 if you want to be given the best interest rate and most favorable terms,” suggests Solomon of Oak View Law Group.

Some lenders may have different minimum-income requirements, too. Be prepared to furnish proof that you can afford your monthly payments by providing recent paystubs, history of employment, and recent tax returns, if requested.

“It’s also best to strive for a debt-to-income [DTI] ratio of less than 36% to increase your chances of qualifying. But some lenders may accept a highly qualified candidate with a DTI of up to 50%,” Solomon adds.

The requirements to qualify may be less stringent if you choose an alternative lender beyond your bank or credit union. “However, you will likely pay higher fees and interest rates with an alternative lender,” notes Pfisterer of Super Processor.

Take the time to fully understand the fees and interest rate associated with a Christmas loan and forecast the impact that repayment will have on your future cash flow before committing to this form of financing.

Other ways to pay for holiday expenses

A holiday loan isn’t the only way to help pay for gifts and other end-of-year expenses. Instead, consider applying for a home equity loan or home-equity line of credit if you are a homeowner who has accrued at least 20% equity in your property. These types of secured loans may charge less interest and offer longer, more flexible, repayment terms.

If you don’t qualify for a Christmas loan, think about using a trusted credit card instead. Purchasing via a credit card comes with perks like buyer protection on some items, as well as cashback or point rewards, depending on the credit card. The drawback is that your credit card may charge a higher interest rate than a Christmas loan would.

“I recommend applying for a credit card with a 0% APR introductory offer if you have strong credit. This will give you time to pay off your holiday expenses without accruing interest, provided you pay the debt back in full before the deal expires,” says Solomon of Oak View Law Group.

Alternatively, pursue a personal credit line offered at a bank or credit union. Here, you only pay interest on the amount used from your credit line. However, you must either pay back any balance due after the draw period or you must ask for an extension of the credit line. Just be forewarned that the interest rate is adjustable.

Other options include borrowing money from a relative or friend, pursuing a payday loan, or applying for an auto-title loan – although the latter two options may be costly and risky.