How to Avoid Using a Payday Loan for Holiday Spending
Inside Subprime: Dec 14, 2018
By Lindsay Frankel
Don’t let the pre-holiday sales fool you – shopping for Christmas gifts isn’t cheap. In fact, Americans expect to spend an average of $885 on presents this year, according to a Gallup poll. And while it can feel great to surprise friends or family members with items from their wish lists, it may not be financially responsible to do so, especially if you’ll need to borrow money to cover the expense.
Sometimes, lenders will advertise “Christmas loans,” which can just by payday loans dressed up for the holiday season. Payday loans carry triple digit annualized interest rates that trap borrowers in debt. Holiday shoppers with bad credit may find that there are few alternative options for borrowing, but a payday loan should always be a last resort. Follow these tips to avoid taking out a payday loan for holiday spending.
Find ways to cut Christmas costs
You may not be able to afford everything on your kids’ lists this year, but being selective about what you purchase will positively impact your kids’ future financial habits, according to a report from T. Rowe Price. Indulgent parents who try to buy everything their kids want tend to have more difficulty teaching their kids to save money, and kids who are spoiled around the holidays are more likely to spend their allowance right away instead of saving. What’s more, parents who splurge on presents are more likely to end up in debt, and 10 percent of these parents said they have an outstanding payday loan.
Discuss prioritizing Christmas wish lists with your kids. Once you know which gifts are most important, you can create a budget for holiday spending. Calculate your expected income for the month of December and subtract any recurring expenses, like rent, groceries, or utility bills. If you’ll have any additional income to put towards holiday spending, divide it into categories such as holiday food, decorations, and gifts. Only buy what you have room for in your budget.
If you have little to no money leftover for holiday spending, consider less-costly homemade gifts for your friends and family or offer them coupons for services such as house-cleaning and babysitting. A Secret Santa gift exchange will also save you money; this holiday tradition requires each member of your group to only buy one present.
Seek alternative forms of credit
The prospect of letting Christmas pass by without giving or receiving gifts may be too bleak for some people to stomach. But if you must borrow, do so responsibly. Make sure you have additional income on the way, and seek out loans with low interest rates that you can manage paying back on time. You might find that friends or family will be willing to lend you money in the spirit of the holidays. If you need to take out a loan, banks and credit unions have loan products that are less costly than payday loans, and it’s worth checking to see if you’re eligible. Credit cards also have significantly lower interest rates than payday loans, but these might not be an option for borrowers who lack established credit history.
Should these options fail, consider taking out a lower-cost installment loan, which you can pay back over a longer time period. If you make your payments on time, your credit score can also improve, which will provide you with greater access to less costly forms of borrowing in the future. Once the holiday season has passed, consider setting up a savings plan to avoid a similar predicament next year.
No matter your financial situation, you don’t have to spend a fortune to enjoy the holidays; take the time to enjoy the company of your loved ones, and save for your future rather than splurging on nonessential material goods.
For more information, see our report on how to spend money responsibly this holiday season.