How much money do you plan to spend on holiday gift buying this year? It’s natural to want to purchase nice gifts for the people you love, but equally as important not to overspend.
At Addition Financial, we often hear from our members at this time of year with questions about the best way to manage their holiday spending. One question we get a lot is this:
“Is it a good idea to use holiday loans for gift buying?”
The answer isn’t a simple yes or no. Instead, we’d say: it depends. Here are six precautions to keep in mind before taking out a holiday loan.
#1: Calculate Your Holiday Budget
The first step is to figure out how much you want to spend on holiday gifts. You want to be generous, but you shouldn’t be spending beyond your means.
It may be helpful to set spending limits (even if they’re just for you to follow) within gift-giving groups. For example, you might decide on a cap of $100 for immediate family members and close friends, $50 for more casual friends and $25 for colleagues and casual acquaintances.
#2: Figure Out How Big a Loan You Need
Once you’ve got a holiday budget in place, you should look at your current savings and think about how large a loan you need. It’s a good rule of thumb to minimize the amount you borrow.
If you’ve got an overall budget of $2,000 and savings of $500 that you’re comfortable using for gift buying, then you’ll only need to borrow $1,500. This strategy will help you keep your lending under control.
#3: Figure Out How Much You Can Afford to Repay
It might seem like figuring out how large a loan you need is the last step, but it’s not. You must ask whether you can afford to repay what you borrow. After all, you won’t be doing yourself any good if you spend money now that you can’t afford to pay back later.
The best way to tackle this task is to look at your monthly budget and your fixed expenses. Ask yourself:
- Do I have discretionary income each month that I can use to meet my loan obligations?
- Are there areas where I can cut costs to accommodate the loan payment?
- Do I have enough money set by for emergencies that repaying the loan won’t be a problem?
If you answer “No” to any of these questions, you should think carefully before you take out a loan. You must be financially responsible in order to be generous.
#4: Take a Moment to Think About Need
It’s never a good idea to take on new debt lightly. That means before you begin the process of applying for a holiday loan, you should take a step back and ask if there’s any other way to pay for your holiday spending.
For example, you might be able to approach your friends and family about a Secret Santa exchange where you each buy a gift for one person in the group. Or, you could trim back your expenses over the next month or so and see how much money you can set aside for gift giving.
As a rule, we believe that taking out a loan for holiday gift giving should be carefully considered and not undertaken lightly. If you can find ways to trim your spending, that may be better for your long-term financial health.
#5: Read the Fine Print
All loan documents contain a great deal of legal language and fine print. In some cases – and with some lenders – the fine print may include hidden fees and charges. For that reason, it’s essential to read the entire loan agreement before you sign on the dotted line.
Some of the fees to look for include:
- A loan processing (or loan origination) fee
- Failed payment fee (for automated payments)
- Late payment penalty
- Early payment penalty
If there’s anything you don’t understand in the loan agreement, make sure to get clarification before you close on the loan. That way, you won’t be surprised by any hidden fees or provisions.
#6: Choose the Shortest Term Possible
Most mortgages have a 30-year term while car loans usually have a 5-year term. With a personal loan or holiday loan, there are lots of options and you should consider them carefully before you close on the loan.
If you can afford to choose a short-term loan that you can pay back quickly, you’ll pay less interest overall and be out of debt sooner than you would with a long-term loan. Of course, you may also have the option of paying early, but make sure there aren’t any early repayment penalties before you make your choice.
It’s possible that taking out a holiday loan could be the solution you need to buy gifts this year. Taking the six precautions we’ve listed here will minimize the chances that you’ll end up with a debt you can’t handle.
In the market for a holiday loan? Click here to learn about Addition Financial’s personal loans! We also offer a $7,500, 12 month term Holiday Loan in branches. Find your closest branch here.
Posted on Oct 15, 2019
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