What Is a Holiday Loan and How Does it Work?

There is nothing better than the holidays — spending time with the ones you love, decking the halls, spiking the eggnog. But between the many gifts, parties and travel plans, the big expenses that come with the holidays can be as unwelcome as Aunt Edna’s fruitcake. Plus, you’ve still got life's regular bills that, like Scrooge, never take a holiday. But don’t lose the spirit of the season — a holiday loan could offer the helpful hand you’re looking for.

What is a holiday loan?

Holiday loans (sometimes referred to as Christmas loans) are personal loans designed to help you cover the expenses that come with the holiday season. Offered by most lenders, banks and credit unions, these loans could also be used for bills and expenses outside of holiday costs. Either way, a holiday loan could help take the financial burden off your plate and allow you to sit back and enjoy more time with your loved ones during Christmas, Kwanzaa, Hanukkah and other holiday celebrations.

If you’re considering a holiday loan, you can make smart money decisions by learning about the loan process and the types of loans available like secured and unsecured loans. A secured loan requires you to "secure" your loan with something valuable, like a car. This is called collateral and it may help unlock a favorable interest rate or help you qualify for a larger loan amount. If you default on a secured loan, the lender has the right to take possession of the collateral to recover the amount owed.

On the flip side, an unsecured loan doesn't require collateral, which could mean a lower loan amount, higher interest rate and tougher approval process. Whether your holiday loan is secured or unsecured, your loan payments can be spread out over time in fixed monthly payments, giving you a little breathing room.

What can a holiday loan be used for?

• Holiday gifts: You can use your holiday loan to get presents for everyone on your list — from loved ones to coworkers, teachers to babysitters.

• Travel expenses: Another big cost a holiday loan could cover is travel. Paying for flights, a place to stay (because do you really want to sleep on an air mattress again?), gas, rental cars and meals can really stretch budgets. Even with a holiday loan to ease the financial strain, you’ll still want to be aware of the best ways to save on holiday travel to make the most of your holiday budget.

• Financial cushion: With so many other expenses around this time of year, a holiday loan can give you the financial cushion to enjoy the holidays with the people and in the places you love.

• Entertaining costs: Hosting family? No matter which holiday celebration is circled on your calendar, a holiday loan could help with entertaining costs, such as decorating, groceries (if you cook) and catering (if you’d rather not).

Why get a loan for the holidays?

While common advice is to buy gifts gradually throughout the year or to start saving for the holiday season during the summer, not everyone has the extra cash to purchase gifts or book travel in advance. If you end up trying to buy everything in just a month or two, you might have to either use up your savings or rack up credit card debt. You can try making extra money during the holidays to help cover expenses, but if your schedule doesn’t allow extra time for a side hustle, you may find yourself in a bind.

With a holiday loan, you can get one lump sum of money to pay for what you need to make the season brighter. Be sure to find a lender that offers a fixed interest rate and a fixed repayment plan, so you’ll know exactly how much your monthly payment will be and how long it will take to pay off your holiday loan. During the holidays, the only surprises you want are the ones nicely wrapped with shiny bows on top.

Pros and cons of holiday loans

Pros

• Flexible financing: Holiday loans provide quick access to funds to help you cover holiday expenses without depleting your savings.

• Fixed monthly payments: Unlike credit cards, holiday loans usually have fixed payment terms, which can make budgeting easier.

• Lower interest rates: Compared to credit cards, personal loans often come with lower interest rates, especially for borrowers with good credit.

Cons

• Debt accumulation: Taking out a loan for holiday spending can lead to unnecessary debt, especially if you're unable to repay it within the loan term.

• Interest costs: Even with lowering interest rates, borrowing money means you'll pay more than the cost of the original amount you’d spend over time.

• Impact on credit: Missing payments or defaulting can negatively affect your credit score, making it harder to borrow in the future.

Holiday loan alternatives

If you're looking for an alternative to a holiday loan, consider the following:

• Use a 0% APR credit card: A credit card with a low or 0% introductory APR on purchases could help you finance your holiday gifts without accruing any interest. The 0% intro period typically lasts between 12 to 21 months,¹ so just be sure to pay off your balance before the intro period expires. Once the introductory period ends, you'll start accumulating interest at the predetermined rate.²

• Take advantage of holiday sales: Another option is to look out for holiday sales and promotions to stretch your budget further. Plan ahead by setting alerts for big sale days like Black Friday or Cyber Monday and make a list to avoid impulse buys.

• Look for layaway plans: Layaway plans allow you to pay for your holiday purchases over time and help you spread out the cost without using credit. Whatever you do, read the terms and conditions carefully, and make sure you understand any fees or deadlines.

• Start a holiday savings account: Open a separate holiday savings account early in the year, and set aside a small amount each month. By the time the holidays roll around, you'll have a cushion to cover gifts, travel or other expenses without having to rely on a loan or line of credit.

Is it hard to get a holiday loan?

Your ability to qualify for a loan depends on your financial situation, creditworthiness and the lender’s specific requirements. Your credit score, income, debt-to-income ratio and other factors contribute to whether a lender approves your holiday loan application, how much you qualify for and which loan terms they offer you. Research lenders and loan options to find the most suitable holiday loan for you.

Don’t forget to check for prequalified offers instead of applying for multiple loans. Applying will affect your credit score, but checking for prequalified offers will not. It gives you a preview of what loan amount may be available to you, pending more information that comes with a full application.

Enjoy the holidays without breaking the bank

Don’t let financial worries dim your holiday spirit. A holiday loan could give you the breathing room to enjoy the season and make it unforgettable and stress-free. Shop around to find the holiday loan that meets your needs and comes with terms you understand and can afford.

If you need extra money this holiday season, OneMain Financial is here to help make your holidays bright. Check out our current holiday loan offers without affecting your credit score.

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Sources:

1,2 What does 0% APR mean? - Bankrate

This article has been updated from postings from 2019-2023. Matt Diehl, Kia Jackson, Kim Gallagher, and Melina Duffett contributed to this post.