Who should, and should not, consider a personal loan to pay off holiday debt

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If you’ve had vacation debt this year, you’re not alone: ​​more than 1 in 3 (36%) Americans took out vacation debt averaging $ 1,249 this year, according to LendingTree. In addition, these debts are often difficult to pay off: a recent NerdWallet survey found that 29% of shoppers who placed gifts on a credit card in 2020 have borne this debt year-round.

One way to pay off vacation debt that can save you money? However, taking out a personal loan can be risky. If you have a good credit rating, a personal loan can be a much cheaper way to finance holiday purchases instead of a credit card. “If you can qualify for a personal loan of around 5% or 6%, that’s way better than the average credit card that charges over 16%,” said Ted Rossman, senior industry analyst at CreditCards.com. And a personal loan can make even more sense when you are consolidating other high-yield debt, such as: B. Loans and Credit Card Debt. However, this is not the right option for everyone, and there are risks. Here’s what you need to know.

See which plan you might qualify for

Since personal loans can help borrowers gain access to significant amounts of cash, sometimes at a relatively low interest rate, they can be a great way to deal with high-interest vacation debt, according to Jacob Channel, senior economic analyst at LendingTree. However, it depends on what interest rate you might get: while someone with great credit will get an interest rate of 5 or 6%, others may be offered over 20%.

Get multiple offers

“When the holidays come and go and you have a large card balance, do a little research and use a debt consolidation calculator to see if a consolidation can save you money. When you buy a personal loan, you qualify with a handful of lenders to get a feel for the interest rate and loan amount you qualify for, ”said Annie Millerbernd, personal loan expert at NerdWallet.

Don’t forget the fees

Another consideration when taking out a personal loan are the fees. “The fee to watch out for is an origination fee,” says Millerbernd. “Personal lenders who charge a commitment fee often remove a percentage of the amount you borrow from the loan before it is posted to your account. This is something to keep in mind when trying to borrow a certain dollar amount because with a commitment fee you could be a few hundred to a few thousand dollars short, ”says Millerbernd.

Don’t use personal loans for the wrong reasons

While personal loans at low interest rates can make sense to combat high-interest debt, Millerbernd notes that they represent a huge commitment to short-term, discretionary purchases. “Everyone itches to get out and travel these days, but even the smallest personal loans often have repayment periods of a year or more,” says Millerbernd.

Don’t use a personal loan as a patch solution

If you’re someone who “is considering using a personal loan as a temporary patch to break up your credit card limits for extra spending,” says Channel, you should Consider other options like credit counseling. ”Instead, use a personal loan to save money and develop better financial habits in the future.

Consider alternative solutions

Another, possibly cheaper, way to pay off vacation debts is with a 0% interest balance transfer card. “This gives you a few months of interest-free debt to work off, which can take the pressure off. However, you need strong credit to qualify, ”said Millerbernd.

Make a budget so that you can avoid such loans in the future

Channel says the best way to deal with the debt accumulated over the holidays is to stay organized and conscientious about repayments. When you take out a personal loan, you need a plan to pay off that personal loan – “look at debt settlement strategies like snowball and avalanche methods,” says Millerbernd – and don’t spend more than you can afford on credit card. This type of planning can be incorporated into your budget.

Make another plan for how you will cope with the holidays in the future

“I’m not a huge fan of taking on retail or vacation debt. I’d rather see people avoid going into debt over the holidays. Maybe there are cheaper ways to celebrate, like buying fewer gifts or giving homemade gifts, ”says Rossman. So, set a good budget in the future and stick to it. “Maybe you and your family can just shop for the kids … or maybe you can set up a secret Santa and buy for someone else instead of the whole group. You can also give away time – offering to take care of your sister’s children so that she and her husband can go on a date without having to pay for a babysitter, ”says Rossman.

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