The holidays tend to be the most expensive time of the year. Trips to visit family, shopping for Christmas presents and all the extra entertaining can put a dent in any budget. For some people, Christmas expenses are covered with savings, a holiday bonus check or credit card financing.
But where do consumers with poor credit history and no savings turn? Not many financial borrowing products are available to those who need it most. Christmas loans are a cheery-sounding financial product that offer fast cash during the holiday season to those who may not be able to borrow elsewhere. But are these loans naughty or nice?
What Is a Christmas Loan?
A Christmas loan is a type of short-term personal loan marketed to fund holiday spending for things like Christmas gifts and holiday travel. Like other types of personal loans, Christmas loans are installment loans with a set repayment period that can be secured — backed by collateral like a vehicle or savings account — or unsecured. If a borrower defaults on a secured loan, the lender can claim the asset used as collateral to reimburse itself for the unpaid loan.
Terms for Christmas loans depend on the borrower’s credit history and income. The higher the applicant’s credit score, the more likely the lender will offer an unsecured loan with an interest rate lower than the average credit card APR.
A holiday loan gets tricky for borrowers with low credit scores. The best terms may not be available to an applicant with a checkered credit history. Some holiday loans don’t require a credit check, but tend to have incredibly high interest rates — up to 1,% APR — that could get a borrower in trouble.
Christmas Loans Pros and Cons
Here’s a quick look at the pros and cons of a Christmas loan to help you decide if this borrowing option is right for you.
Are Christmas Loans Really Just Payday Loans Wrapped in a Neat Bow?
Many Christmas loans marketed to borrowers with poor credit that need cash fast are payday loans with a holiday-themed name. Like payday loans, they usually offer smaller loan amounts that must be repaid over a shorter period — usually from one paycheck to the next. Unfortunately, a payday loan could cost far more than some people can afford.
What To Watch Out for When Taking a Christmas Loan
Before taking out a loan, do your research and compare several financial products and services when shopping for a Christmas loan. Some loan interest rates and fee structures could cost you more than you were willing to borrow in the first place. When comparison shopping for a Christmas loan, review:
- The loan’s interest rate
- Additional fees like prepayment penalties or borrowing costs
- Repayment period
- Other loan terms
Just because a Christmas loan is short-term doesn’t mean the high interest rate won’t affect you. Read on to discover how much a payday loan — disguised as a short-term Christmas loan — could cost you.
Christmas loans that are structured like payday loans charge a percentage or dollar amount for every $100 borrowed. This method is costly and can get a borrower in trouble. Here’s how:
- You need to borrow $500 ASAP.
- The lender discloses they will charge $15 for every $100 you borrow.
- You borrow $500.
- You repay the loan plus fees for a total of $575 in two weeks.
That equates to an annual percentage rate of almost 400% for a two-week loan. Although the APR of 400% is shocking, the payday loans Edon, tn no credit check $75 borrowing fee may be a lifesaver if you’re in a pinch and have an emergency that can’t wait. But what happens if you can’t repay the loan in two weeks?