No matter how well intentioned we are and no matter how much we may plan for it, holiday expenses have a way of getting out of hand.
Taking on debt for Christmas shopping is nothing new, and if you’re properly prepared and have a plan to repay that debt, it’s not inherently bad (though it’s better to avoid it). That said, because holiday spending is emotionally charged, it’s easy to get pulled into financial offers that seem helpful, but end up hurting you in the end.
If you’re stretching yourself financially this season, keep an eye out for these three particularly worrisome financing options.
A Christmas loan (or holiday loan, or vacation loan, etc.) is really just a regular old unsecured personal loan with a festive bow on top. Because there’s no collateral in an unsecured loan, they’re riskier than a secured loan (like a mortgage) and will usually have a substantially higher interest rate. And because it’s a loan, there’s a good chance that you’ll have a variety of fees to pay.
Even more concerning are no/bad credit loans, which are essentially payday loans. They usually feature small windows for repayment and extremely unfavorable interest rates.
While it’s completely understandable that the pressures of the season may drive you to spend beyond your means, it’s just not a good idea to take out a loan to handle non-essential seasonal expenses.
Some lenders are happy to offer you the opportunity to occasionally skip an upcoming loan payment (usually for car loans or mortgages). You may even see this offer advertised during the holiday season as a way to find the cash needed for all those extra seasonal expenses.
The problem is that skipping a loan payment is a bit more costly than it seems. There’s usually an application or processing fee, which can range from $20-$35. That may seem reasonable if you’re subtracting it out of the balance of the payment you didn’t make, but it’s not the only cost.
When you skip a payment, the length of your loan is extended by one month. Meanwhile, interest continues to accrue, even during the “skipped” month. For lenders, it’s a pretty good deal – at no cost to them, they add the application fee plus an extra month’s worth of interest charges. For borrowers, though, it’s not a very good at all. And if you’re skipping a loan payment to buy presents it’s a really bad deal.
POINT OF SALE FINANCING
Store credit is nothing new, but it’s only become more prevalent as online retailers have made point of sale financing even more central to the buying experience. That point of sale offer may come in the form of a special credit card (if you’ve ever shopped on Amazon, you’ve almost certainly seen this in action) or a payment plan.
Store credit cards don’t usually have the best possible terms, but most importantly they only really serve to drive you back to that one particular store over and over again. Payment plans, on the other hand, increase the overall cost of the purchase by adding fees and other charges.
There will be times when you’ll need to purchase something that you simply can’t afford to pay up front, and that’s okay. But the added costs associated with financing Christmas presents and holiday supplies is almost always a bad investment.