Christmas Loans: Are They Really Such a Good Idea?
Christmas is supposed to bring laughter and good cheer, but with all the additional expenses Canadians have during this time of year, it can be difficult for many to be merry. The cost of gifts, photos with Santa, Christmas décor (including the tree!), travel and other holiday-related expenses can quickly add up. In fact, for many families, their holiday expenses far exceed their monthly budgets. If this is the case with you, you may consider lightening the financial load by taking out a Christmas loan. Before you do so, seriously weigh the pros and cons, as the benefits may not outweigh the risks of borrowing.
The Cost of Christmas
Before exploring the reasons why using a Christmas loan can be a bad idea, it’s helpful to understand just how out of control holiday spending is throughout Canada. According to a series of surveys, the average Canadian will spend more than $600 on holiday gifts, though in some areas, such as Ontario, the average is much higher, at $800. That’s just for gifts, too. Many respondents said they also plan to spend another $300 or so on décor, plus more on food, beverages, charitable donations and other holiday merriments.
These projections are based on respondents’ proposed budgets. Seven in 10 respondents anticipate spending beyond their budget, especially when it comes to their children and significant others. Three out of 10 said they would likely later regret how much they spent during the holiday season. 60% said they are willing to go into debt if it means making others happy.
"Christmas Loans” Are Often Payday Loans in Disguise
As you shop around for financing options during the holidays, you may come across a few that advertise themselves as "Christmas loans.” These Christmas loans are usually payday loans in festive disguise.
You want to avoid payday loans altogether. Though you may be tempted to take advantage of the fast cash the lender offers (and without even checking your credit score!), don’t take the bait. Though payday loans are quick and easy to acquire, they almost always come with exorbitant interest rates and nearly impossible-to-meet terms.
For instance, most lenders require borrowers to repay the funds within two to four weeks, plus interest. Interest on a payday loan is typically calculated per $100 borrowed. If you borrow, say, $500, and the lender charges $15 per $100, you would have to pay what equates to a 390% annual percentage rate.
When a Christmas Loan Isn’t a Payday Loan, It’s a Personal Loan
If a Christmas loan isn’t a payday loan, it’s a personal loan. Personal loans come with more lenient terms and better rates than payday loans.
The average repayment terms and APRs on personal loans vary depending on how much a person wishes to borrow, his or her credit score and whether the loan is secured or unsecured. However, for a $500 to $1,000 unsecured personal loan, you can expect an APR between 2.99% and 29.99% and repayment terms of between three to 12 months. With personal loans, you still receive funding quickly. Many lenders direct deposit money into borrowers’ accounts within 12 to 48 hours.
Though a Christmas personal loan may seem like a good idea — after all, how difficult can it be to repay $500 to $1,000 over a three- to 12-month period? — you should carefully weigh the pros and cons of borrowing to afford the holidays. For one, you likely need a loan because you exceeded your budget and ate into your savings. Come January, you may find it challenging to meet your monthly living expenses, much less afford to pay down a loan. This may put you in a worse financial predicament than the one in which you started.
Two, the cost of interest can quickly add up. If you take out a $2,000 loan with a 10% APR, and you make minimum monthly payments of $100, you will end up paying $196.97 in interest throughout the life of the loan. That is $200 you could have budgeted for next Christmas season.
Three, personal loans often come with additional fees. Some lenders charge a prepayment fee, others may charge an origination fee, while many lenders charge both. These fees, in addition to the interest, can make the loan unaffordable.
Finally, if you miss a payment or are late on a payment, the negative activity will reflect on your credit score. Be sure to calculate interest in the estimated repayment amounts to ensure you can afford monthly payments.
Do Your Due Diligence
Ideally, you will not spend more on Christmas than you can afford. However, if you absolutely must borrow money, be smart in how you choose to do so. Explore your options before jumping on any one offer and compare interest rates, terms and fees. LoanConnect’s Personal Loan Search Engine does all the hard work for you. Simply input your financial information and receive multiple offers in as little as 60 seconds. Shop around today to find the best financing for your situation.