Should You Use a Personal Loan for Holiday Shopping?

More than half of Americans do their holiday shopping without a budget and a fourth of last year's regretful shoppers ended up struggling to pay off their unplanned spending. The figures, released late October in LendingTree's 2015 Holiday Shopping Survey, indicate that too many consumers overspend, using credit cards with high interest rates that plague finances through the following year.

While the survey reveals that most Americans plan to spend about the same amount of money on holiday shopping this year as in 2014, most have no plans or budget. Last-minute, unprepared, or impulse shoppers would do well to consider an unsecured personal holiday loan over the option of loading up on high-interest plastic. The math on interest savings alone is quite simple:

  • Average credit card rates (Federal Reserve report, Jan. 2015): 13.91 percent.
  • Average interest rates on 24-month personal loans: 10.22 percent.

Personal Holiday Loans over Revolving Credit

Shoppers may feel that they're missing out on rewards programs on their credit cards and avoid all talk of holiday loans if they're short on funds. According to findings by The National Foundation for Credit Counseling (NFCC), piling on holiday credit card debt to an already stretched plastic balance can turn anyone into a long-time Scrooge. Before leaping into deals, consumers can benefit from understanding the distinctions between credit card and personal loan debt.

For consumers worrying they can't get loans in time for the holidays, unsecured personal loans from banks and credit unions can be completed in a day, which should appease even the most disorganized, unprepared holiday shoppers. Rates are pegged to credit scores, with excellent-credit borrowers receiving interest rates below 10 percent. And unlike revolving credit, the loan rates are locked in through the term, staving off potential debt problems after holiday lights are taken down and put away for another year.

Another plus of choosing a personal loan over revolving credit is that the borrower rebuilds or improves their score by making prudent payments without drumming up increasing balances that may linger and damage credit going forward.

Exploring Holiday Loan Options

Holiday loans, whether unsecured loans or personal lines of credit, can free up spending options for smart borrowers. Consumers can use them to retire outstanding credit card debt, purchase holiday travel, and distribute their holiday spending over a predictable payoff schedule. Opening a personal line of credit with a lender can also provide ample holiday funds, but should be made by cautious borrowers: The associated variable interest rates coupled with unplanned shopping splurges can take a nasty bite out of their finances.

Ways to Avoid Holiday Borrowing

Ten percent of last year's holiday shoppers had to rely on credit cards or borrowing, and another 10 percent admitted they overspent for lack of planning. The number one tool for keeping holiday costs contained is to set a budget and stick to it no matter the temptations from credit card companies or stores offering their own cards. The LendingTree holiday survey found that 75 percent of spenders have shopped without a budget. More than 50 percent don't have a budget for 2015 and don't plan on making one.

Another way to get ahead for next year is to pay off the highest credit card balances and those with the highest interest rates first. Reducing the credit utilization rate is another way to free up room if you really plan on using credit for the holidays. A debt consolidation loan taken during the year at interest rates lower than those on existing debt can also free up cash for the holidays.

Enjoy the gift of giving, but give wisely.

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