Holiday loans: What they are, how they work, and alternatives

Key takeaways:

• Holiday loans can be a good option to cover end-of-year expenses.
• To apply for a loan, make sure you have proper documentation beforehand.
• If holiday loans aren't the best fit, consider alternatives such as opening a personal line of credit, shopping early, and saving year-round.

Fretting over how to afford that expensive holiday wish list this year? Well, you're certainly in good company.

The facts are in: According to a 2024 Debt.com survey on holiday debt, 66% of the participants surveyed responded that they would take on debt to finance their holiday shopping list.

While only about a quarter (26%) anticipated only a small amount of debt ($100 to $300), 25% shared they would take on at least $900. A small majority (10%) predict debts higher than $1,000.

As you can see, shouldering debt to pay for the holidays is fairly common.

One way to help stomach the costs is a holiday loan, which refers to a personal loan used to finance your long list gifts, holiday-related travel, and other sundry expenses at this busy – and expensive – time of year.

Here, let's take a look at holiday loans, how they can help you fund end-of-year expenses, their pros and cons, and how to go about getting one:

How holiday loans are unique

If you put a holiday loan and standard personal loan side by side, you would find that there's a handful of shared features. Both are usually unsecured, which means you won't have to offer collateral to back it up. Also, they both offer a repayment of anywhere from 12 – 60 months.

While they bear similarities, holiday loans are unique in their availability. Many banks, credit unions, and other financial institutions offer holiday loans during the winter season.

One thing to note: Lending limitations for holiday loans also are lower than those of regular personal loans – for instance, they might come with smaller loan amounts and shorter terms. However, the terms and conditions vary by lender. And the loan amount and interest rate can hinge on your creditworthiness and other financial factors.

How to get a holiday loan

You can get holiday loans through banks, credit unions, and online lenders. Some tax servicers – think H&R Block – might offer holidays loans. How? By allowing tax filers to borrow against their tax refund. Note this is only available for a limited time each year.

For standard personal loan lenders that offer holiday loans, you'll typically need to have a minimum credit score that starts at 610 – 640. That said, you'll usually need a minimum score of 650 to land more favorable rates and terms. 

The importance of checking your credit report

Before applying for a holiday loan, it's a good idea to check your credit report and credit score. You can get a free weekly credit report at AnnualCreditReport.com.

When you look at your credit report, see if you can spot any inaccuracies or missing information that could negatively impact your score. If you find anything, you can file a dispute with the credit reporting bureau – Experian®, Equifax®, or TransUnion®.

Your score signals to lenders your creditworthiness, or ability to repay back money borrowed. If your score doesn't meet what the lender requires, your holiday loan application likely won't get approved.

Determine how much you need for the holidays

It's also a good idea to take stock of your finances and figure out how much you'll want to borrow for the holidays. You can start by creating a holiday budget. This can include everything from gifts for friends and family, travel-related expenses, holiday garb, special outings and dinners, and festive events.

When you have a firm idea of how much you'll need for the holidays, you can avoid overborrowing. Remember: That's money you'll need to pay back – along with interest. In turn, aim to only take out what's necessary.

Compare lenders and rates

To find the lowest rates and most favorable terms, research holiday loans from different lenders. You'll want to get quotes from a handful of lenders, then compare them side by side.

If it's an option, get prequalified. Prequalification is where you can figure out the loan amount and interest rates you'll likely get approved for. The beauty of getting prequalified is that it doesn't impact your credit score since because it's a soft pull on your credit.

Gather necessary documents and apply for the loan

When you apply for a loan, lenders will ask for your proof of identification, proof of income, and bank account information. Exactly what kind of loan documentation is needed depends on the lender, so you'll want to do your homework and take a look at what's required ahead of time.

Once you've gathered the proper documentation, you'll also need to look over the loan application before submitting it to the lender. Missing or incorrect information can cause a snag in the application process or delay in the processing time. 

Holiday loan pros and cons

You'll want to weigh the pluses and minuses of taking out a holiday loan before landing on a final choice. Let's look at both:

Holiday loan alternatives

Per the Debt.com survey, while two-thirds (66%) plan to take on debt to pay for the holidays, about one-third (33%) were not anticipating a bump up in their debt load to pay for presents.

If you don't meet the credit score qualifications for a holiday loan, to help you pay for those holiday purchases, consider alternatives to holiday loans – which we'll delve into next.

Save year-round

If you'd like to avoid racking up additional debt during the holidays, stashing cash year-round can make sure that you have a holiday spending fund that covers all your  purchases.

You can start by tucking away a small amount each month or week. Maybe begin your holiday fund with $20. That way, you can create a nest egg for year-end spending.

Start shopping early

Shopping early or year-round for holiday purchases can help give you more bang for your buck. Plus, by buying a little each month, you can minimize your odds of a holiday debt hangover.

Sure, you can score amazing deals during Black Friday. But you can also consider after-holiday sales for the year. Though it’s too late for this tactic this year, next year you might swoop up deals during summer sales and Labor Day sales to pocket additional savings.

Open a personal line of credit

A personal line of credit is essentially a revolving credit account. In other words, once the borrower pays back the funds, the credit availability replenishes.

Once you open this line of credit, you'll only pay interest on the amount you borrow. In comparison, holiday loans rack up interest on the total loan amount.

Use a credit card

It's not uncommon to charge holiday purchases to your credit card. Per data from LendingTree, folks who took on holiday debt borrowed an average of $1,181. Further, 65% put purchases on their credit card, and 24% on a store card.

While using your credit card can be a convenient way to cover purchases, credit cards usually also charge high interest rates. However, some cards offer a 0% promotional annual percentage rate (APR). If you stick to your monthly payments and pay the balance in full before the promotional period ends, going this route could be a smart financial move.

Buy now, pay later

These days you'll find that many online retailers and brick-and-mortar stores offer buy now, pay later (BNPL) options. These companies include Klarna, Affirm, and Afterpay. When you go this route, you can break down your payments into several installments over the course of a couple of months.

Before you click the "BNPL" option, you'll want to carefully pore over the terms and conditions. That way, you'll be clued in on any charges and fees that are tacked onto this payment option.

White it can help you spread out your payments for holiday purchases, research from the Harvard Business Review (HBR) reveals that these services often can lead to overspending. For example, consumers who adopted BNPL are more likely to make a purchase – with an increase from 17% to 26%. Further, when consumers used BNPL to cover their purchase, their basket sizes were 10% larger than pre-BNPL.

FAQ

You can learn more about holiday loans by exploring frequently asked questions: \

Can I get a holiday loan with bad credit?

Your creditworthiness plays a large part in your ability to get approved for a loan. Still, you may be able to get a holiday loan if you have a modestly low credit score. However, you'll want to keep in mind  that a holiday loan with bad credit will yield less-than-ideal loan terms. Check with different lenders to see what loan terms they offer to those with your credit score.

Where can I get a holiday loan?

You can secure a holiday loan at some banks, credit unions, and tax preparation companies. You might also be able to get a holiday loan from an online lender. Each lender has unique loan offers, so do your homework to find the most appropriate one for you.

When do holiday loans start?

Financial institutions usually offer holiday loans toward the end of the year, typically in November or December. Some lenders start offering these loans as early as October.

Should I get a holiday loan?

A holiday loan may be a good choice if you’re low on cash now but will be able to repay the balance quickly and on time. If you have good credit, you may qualify for a holiday loan with favorable terms like a low interest rate. You could end up paying less in interest with a holiday loan than you’d pay on a credit card.

On the other hand, if you’re ineligible for ideal loan terms, you could face a higher interest rate and pay more in overall interest with a holiday loan. A holiday loan also may not be the right choice if you’re unsure whether you’ll be able to manage another monthly payment.

The bottom line: Understand the true cost of loans for holidays

With two-third of folks in the U.S. taking on holiday debt, it's key to make a budget and borrow only the necessary amount when considering a holiday loan. That way, you can steer clear of ringing in the new year saddled with debt to pay off.

If holiday loans might not be the best fit for you, you can save year-round, take out a personal line of credit, start shopping early, or use a credit card. Explore personal loans with Rocket Loans^SM.