Thursday, 14 December 2023

Before You Take Out a Personal Loan to Buy Holiday Gifts, Do This

by Rose White

Before You Take Out a Personal Loan to Buy Holiday Gifts, Do This

Image source: Getty Images

Many people are still scrambling to finish their holiday shopping. And you may be in the process of running from store to store, or website to website, in an attempt to complete your list ahead of Dec. 25.

If you’re realizing that the cash in your savings account won’t suffice in covering your holiday gifts, then you may be looking into taking out a personal loan. The nice thing about personal loans is that they allow you to borrow money for any purpose. So even if all you’re looking to do is pay for some gifts, that option exists.

But while you might think that a personal loan is a good solution to your holiday shopping needs, you might regret signing one at a time like this.

Borrowing rates are high

You may have heard that over the past year and a half or so, the Federal Reserve has raised interest rates numerous times to slow inflation. But that’s driven the cost of consumer borrowing up.

To be clear, the Fed does not set personal loan rates. It doesn’t set any consumer product rates, for that matter. Lenders set those rates themselves.

But the Fed’s rate hikes have made it more expensive for financial institutions to borrow from each other in the short term. And so banks have been passing those higher costs onto consumers in the form of higher interest rates on loans.

Because of this, even if you have a great credit score, you may find that a personal loan is expensive to sign this holiday season. And you may not be happy with the amount of interest you end up paying.

Run the numbers and rethink your plans

Before you rush to sign a personal loan this season, calculate what it’ll cost you interest-wise. Let’s say you take out a $1,000 loan (which not all lenders will let you do, as many have higher borrowing minimums) at 10% interest. If you pay it off over two years, you’ll lose about $107 to interest, which, frankly, is a lot of money.

Plus, you’ll have about a $46 monthly payment hanging over your head for 24 months. That’s just another aggravating bill to deal with. So rather than go that route, think about ways you can trim your holiday spending.

One thing you may want to do is limit your gift purchases. Instead of four gifts per child in your household this year, stick to two or three. Or, limit yourself to one big-ticket gift, and make the other things you hand out smaller items.

You may also find that your local dollar store is a great resource for low-cost gifts if your kids are young enough where quantity might trump quality. If you have a 4-year-old, some crayons and coloring books that cost roughly $1 apiece might be more than well-received. For a child in elementary school, see if your dollar store has cute journals, pens, or crafting supplies they might enjoy.

It’s natural to want to go all out for the holidays. But signing a personal loan to buy holiday gifts is a move you might regret after the fact. So think carefully before committing to debt, and consider ways to limit your costs instead.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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