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What Is a Holiday Loan and Should You Take One?

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The holiday season is fast approaching. While the COVID-19 pandemic has dampened sentiments, many people still want to have their usual celebrations this holiday season. Like other expenses, you can either fund holiday expenses with your savings or take out a loan. What is a holiday loan? Which companies offer holiday loans? 

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What is a holiday loan?

A holiday loan is a type of personal unsecured loan. Usually, the loans are only offered during the holiday season. The loans are meant to cover expenses related to travel, gifts, and parties. Most lenders don't put restrictions on how you spend the money. Holiday loan amounts are normally $500–$5,000.

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Since a holiday loan is a type of unsecured credit, the lender takes a higher risk compared to secured debt. As a result, banks and other financial institutions charge a higher interest rate on holiday loans compared to loans that are backed by some assets. However, the interest rate is way below what banks charge on credit cards.

Which companies offer holiday loans?

Most banks and credit unions offer holiday loans. As the holiday season approaches, many companies even market their personal loans as a holiday loan. Like a personal loan, it's easier to get a holiday loan compared to a secured debt like a mortgage.

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What are the cons of taking a holiday loan?

Most financial planners advise against taking a personal loan. “Generally, I am against taking out a loan for holiday spending,” says Chicago-based certified financial planner Henry Gorecki. He also said, “Holiday spending is a luxury, not a necessity … and money for the holidays should’ve been budgeted for throughout the year.”

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Robert Kiyosaki, the author of Rich Dad Poor Dad classifies debt as “good debt” and “bad debt.” He defines good debt as the debt that makes one richer. An individual uses good debt to buy assets like property. According to Kiyosaki, bad debt makes one poorer and is used to buy liabilities.

What are the pros of taking a holiday loan?

While a personal loan like a holiday loan usually isn't a good idea, there are idiosyncrasies involved. The financial part aside, the holiday season takes place once a year and you might have special plans. Personal loans are meant to bridge any shortfall between your savings and expenses.

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If you decide that spending during the holiday season is important, then it's better to get a holiday loan than taking a credit card loan where the interest rate would be much higher. However, you should go for a shorter loan duration. You don't want to pay a higher interest rate on holiday loans for a longer period of time.

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Berkshire Hathaway chairman and legendary investor Warren Buffett also advised against living beyond your means. At the 2004 annual meeting, he spoke to a 14-year old shareholder. Buffett said, “It’s very tempting to spend more than you earn, it’s very understandable.” However, the Oracle of Omaha cautioned, “But it’s not a good idea.”

At the 2020 shareholder meeting, Buffett scoffed at the high interest rates that credit cards charge. Giving an example of a lady who sought his advice on investments, Buffett said that he told her to clear her credit card dues first. “I don’t know how to make 18 percent,” said Buffett referring to the interest rates on credit card dues.

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