Should You Take Out a Personal Loan to Cover Your Holiday Expenses?

by Maurie Backman | Updated July 21, 2021 - First published on Oct. 27, 2020

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A woman baking cookies in her kitchen with a Christmas tree in the background.

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A personal loan is a more affordable way to borrow than racking up credit card debt. But is it worth taking one out for holiday spending?

Many people pledge to save for the holidays in advance, only to find that they're none the richer by the time late November rolls around and those expenses start popping up. If you're not sure how you'll swing your holiday spending this year, you may be thinking of taking out a personal loan. With a personal loan, you can borrow money for any reason, and you'll usually qualify based on your credit score coupled with your ability to repay your debt (meaning you'll need an income source, like a job, for a lender to feel comfortable loaning you money).

Personal loans are usually preferable to credit cards for a couple of reasons. First, personal loans tend to charge a lot less interest, which makes your debt less costly. Second, a personal loan won't hurt your credit score if you make your payments on time. A high credit card balance, on the other hand, could damage your score by driving up your credit utilization ratio.

But while a personal loan might seem like a good solution for covering your holiday expenses, it still pays to think twice before taking one out.

The danger of debt

Some people have no choice but to incur debt when emergency expenses arise. If your roof starts leaking and you don't have the $1,200 to pay for a repair crew, a personal loan makes sense, because you can’t put off that sort of expense. Similarly, if your car breaks down and you need it to get to work, it pays to get a personal loan to cover the repairs if you don't have the money in savings.

But taking out a personal loan for non-essential expenses is a poor idea. So if you're finding yourself cash-strapped as the holidays near, you're better off avoiding the loan and instead altering your plans. If you take on debt to pay for gifts, travel, decorations, and cards, you'll only end up paying more for those items in the form of interest, even if that interest is less than what you'd pay on a credit card. Also, if you take out a personal loan for holiday spending, you'll risk falling behind on your payments, which could seriously damage your credit score. If it does, and you then need to borrow money for a true emergency, that option may be off the table.

A better approach to the holidays

The best way to cover your holiday expenses is to save for them in advance. If you've already missed the boat on that, then your next best bet is to trim your spending in a meaningful way.

If you normally spend $600 on gifts for friends and family, cut that down to $60 by giving out batches of from-the-heart homemade treats instead. Or explain to the important people in your life that you can't give presents this year because it would put a strain on your finances.

Meanwhile, you can downgrade your decorations or, if you have kids, enlist their help in making your home look festive. Outdoor lighting can be costly, and it can cause your electric bills to skyrocket, but that doesn't mean you can't adorn your living room with tinsel and garlands.

Finally, if you're in the habit of sending out dozens of custom holiday cards, swap those for an email blast. It's an easy way to reach everyone you want to share good wishes with, and it won't cost you a dime.

Though personal loans make it easy to borrow money affordably, you shouldn't take one out for just any reason. If an emergency arises, a personal loan is a reasonable choice, but don't get one for expenses that you can avoid altogether.

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