As you get ready to start gift shopping for the holiday season, you may find yourself short on money. This is a common problem that many Americans face every year heading into the holidays. With the shortage of money always comes the temptation to take out a loan. Banks take advantage of the holiday rush by advertising small-dollar holiday loans. These loans are often an attraction because many of them do not require a credit score check before approval. This means that essentially anybody can take out a holiday loan if they want to. However, you may want to consider if taking out a holiday loan is worth it before you sign that dotted line. There are several major drawbacks to taking out a holiday loan.
One of the main drawbacks of a holiday loan is the high-interest rate. Banks understand that people who are short on cash during the holiday season are desperate to increase their funds by any means necessary. Since people usually can not skip out on buying gifts, they are willing to take out a loan with an extremely high-interest rate. Interest rates on holiday loans can be as high as 16% in some cases. For a small-dollar loan, that is extraordinarily high. It is a good idea to avoid holiday loans whenever possible because of their ridiculously high-interest rates.
Most personal loans will feature a payback period of between 12 and 60 months. This means that you will be stuck paying off your holiday loan for between 1 and 5 more holiday seasons. It can be extremely frustrating to be stuck paying off a loan for this long, especially when the loan was only for a few thousand dollars or less. When you are still paying off a loan, it can sometimes be harder to take out another loan. Therefore, a holiday loan could impact your ability to take our loans that are more important.
Many holiday loans couple their long payback period with prepayment penalties. With prepayment penalties, if you come up with the cash necessary to payback the loan early, you will have to actually pay more in fees than if you pay it back incrementally across the entire payback period. This can be extremely annoying for people who want to get the loan payments out of the way and not be forced to worry about their loan repayment longer than they have to. To avoid the constant worry of a loan payment, avoid holiday loans entirely.
One of the most overlooked yet common drawbacks of a holiday loan has nothing to do with the actual terms of the loan. This drawback is that when you take out a loan, you will feel obligated to spend all of it on holiday shopping. Even if you normally spend less than you take out with your loan, you will subconsciously feel compelled to spend more so that you do not feel as if you wasted the loan. This can put you in an even worse financial place, as you could end up overspending on holiday shopping.
Overall, holiday loans are not a good option when you are short on cash during the holiday season. Their high interest rates, long payback periods, and prepayment fees make them a terrible financial idea. If you are desperate for money during the holiday season, you should consider another means of getting some extra cash.