Plus, how best to get a personal loan if it makes sense for you.
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If you found yourself in holiday debt this year, you’re not alone: More than 1 in 3 (36%) of Americans took on holiday debt this year, averaging $1,249, according to LendingTree. What’s more, it’s often hard to pay that debt off: A recent NerdWallet survey found that 29% of shoppers who put gifts on a credit card in 2020 carried that debt all through this year.
One option for paying off that holiday debt that could save you money? Getting a personal loan, though doing so can be risky. If you have good credit, a personal loan can be a much more affordable way to finance holiday purchases instead of a credit https://installmentloansgroup.com/payday-loans-in/ card. “If you can qualify for a personal loan around 5% or 6%, that’s a lot better than the average credit card, which charges over 16%,” says Ted Rossman, senior industry analyst at . And a personal loan can make even more sense if you’re consolidating other high-interest debt, like consolidating loans and credit card debt. That said, it’s not the right option for everyone, and there are risks. Here’s what you need to know.
See what rate you might qualify for
Because personal loans can help borrowers get access to a significant amount of cash, sometimes at a relatively low interest rate, Jacob Channel, senior economic analyst at LendingTree, says they can be a good way to deal with high-interest holiday debt. But it depends on what rate you might be able to get: While someone with excellent credit might get a 5 or 6% rate, others might be offered upwards of 20%.
Get multiple quotes
“If the holidays come and go and you’re looking at a big card balance, do a little research and use a debt consolidation calculator to see if consolidation will save you money. If you’re shopping for a personal loan, pre-qualify with a handful of lenders to get a feel for the rate and loan amount you’ll qualify for,” says Annie Millerbernd, personal loan expert at NerdWallet.
Don’t forget about the fees
Something else to consider when taking out a personal loan are fees. “The fee to watch out for is an origination fee,” says Millerbernd. “Personal loan lenders that charge an origination fee often scrape a percentage of the amount you’re borrowing off the loan before it hits your account. It’s something to consider if you’re trying to borrow a specific dollar amount, because with an origination fee you could find yourself a few hundred to a few thousand dollars short,” says Millerbernd.
Don’t use a personal loan for the wrong reasons
While personal loans, if you get low rates, can make sense for tackling high-interest debt, Millerbernd notes that they are a big commitment for short-term, discretionary purchases. “Everyone is itching to get out and travel these days, but even the smallest personal loans often have repayment schedules of a year or more,” says Millerbernd.
Don’t use a personal loan as a band-aid solution
If you’re someone who is “thinking about using a personal loan as a temporary band-aid to free up their credit card limits for additional overspending,” Channel says you should “consider other options like credit counseling.” Instead, use a personal loan to save yourself money, and get into better financial habits going forward.
Consider alternative solutions
Another, possibly cheaper way to pay down holiday debt is with a 0% interest balance transfer card. “This will give a few interest-free months to work on your debt, which may take the pressure off. You need strong credit to qualify, though,” Millerbernd.
Make a budget so you can avoid needing loans like this in the future
Channel says the best way to deal with debt accumulated over the holidays is to remain organized and diligent about paying it back. If you do take out a personal loan, you’ll need a plan to pay off this personal loan – “look into debt repayment strategies like the snowball and avalanche methods,” Millerbernd says – and keep from spending more than you can afford on your credit card. That kind of planning can all be incorporated into your budget.
Make a different plan for how you’ll handle the holidays going forward
“I’m not a big fan of taking on retail or holiday-related debt. I’d rather see people avoid going into debt for the holidays. Maybe there are cheaper ways to celebrate like buying fewer presents or giving homemade gifts,” says Rossman. So going forward, set a good budget and stick to it. “ily can only buy for the kids … or maybe you can set up a secret Santa and buy for one other person rather than the whole group. You can also give the gift of time – offering to watch your sister’s kids so that she and her husband can get a date night without having to pay a babysitter,” says Rossman.
