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

Who should, and should not, consider a personal loan to pay off holiday debt
Written by Publishing Team

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If you find yourself in holiday debt this year, you’re not alone: ​​More than 1 in 3 (36%) Americans got into holiday debt this year, averaging $1,249, according to LendingTree. On top of that, this debt can often be hard to pay off: a recent NerdWallet survey showed that 29% of shoppers who put gifts on a credit card in 2020 carried that debt all year long.

One option for paying off vacation debt that could save you money? Obtaining a personal loan, although doing so can be risky. If you have good credit, a personal loan can be an affordable way to fund your holiday purchases instead of a credit 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 more than 16%,” says Ted Rossman, senior industry analyst at CreditCards.com. And a personal loan can make more sense if you’re consolidating other high-interest debts, such as loan consolidation and credit card debt. However, it is not the right choice for everyone, and there are risks. Here’s what you need to know.

See the price you may qualify for

Since personal loans can help borrowers get a large amount of cash, sometimes at a relatively low interest rate, Jacob Channel, chief economist at LendingTree, says it 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 rate of 5 or 6%, others might get a rate over 20%.

Get multiple quotes

“If the holidays come and go and you’re looking for a large 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 few lenders to find out the rate and loan amount. which you will qualify for,” says Annie Millerbrand, personal loan expert at NerdWallet.

Don’t forget the drawings

Another thing to consider when getting a personal loan is the fees. “The fees to watch are the setup fees,” Millerbrand says. Personal loan lenders that charge a set-up fee will often leave out a percentage of the amount you borrow from the loan before it reaches your account. It’s something to consider if you’re trying to borrow a set amount of dollars, because with the company setup fee you may find yourself short of a few hundred to a few thousand dollars,” Millerbrand says.

Don’t use a personal loan for the wrong reasons

While personal loans, if you get low rates, can make sense for dealing with high-interest debt, Millerbrand notes they’re a great commitment for short-term discretionary purchases. “Everyone is eager to get out and travel these days, but even the smallest personal loans often have repayment schedules of a year or longer,” Millerbrand says.

Do not use a personal loan as a first aid solution

If you’re someone who “is considering using a personal loan as a temporary aid to free up their credit card limits in order to ramp up extra spending,” Channel says you should Consider other options such as credit counseling.” Instead, use a personal loan to save money, and gain better financial habits in the future.

Consider alternative solutions

Another possibly cheaper way to pay off holiday debt is to use a 0% interest balance transfer card. This will give a few interest-free months to work on your debt, which may relieve stress. You need strong credit to qualify,” Millerbernd.

Set a budget so you can avoid the need for loans like this in the future

The channel says that the best way to deal with debt accumulated during the holidays is to remain organized and persistent in paying it off. If you take out a personal loan, you’ll need to have a plan to repay that personal loan—”consider debt repayment strategies like snowball and avalanche tactics,” Millerbrand says—and avoid spending more than you can afford on a credit card. This type of planning can be incorporated into your budget.

Make a different plan for how you will handle the holidays in the future

“I’m not a big fan of taking out retail debt or holiday debt. I prefer to see people avoid getting into debt on the holidays. There might be cheaper ways to celebrate like buying fewer gifts or making homemade gifts,” says Rossman. So from now on, set a good budget and stick to it. “Maybe you and your family can buy just for the kids…or maybe you can make a secret Santa Claus and buy it for someone else instead of the whole set. You can also give the gift of time — offer to watch your sister’s kids so she and her husband can have a date night without having to pay The babysitter,” Rossman says.

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