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Bad credit? Don’t fall for a Christmas loan

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If your credit score is low, get creative for the holidays.

It’s weeks away from Christmas, and if you’ve watched any holiday movies, you know the world expects your house to look a certain way, your Christmas dinner to look perfect, and yes, you’re supposed to go too far, fulfill the dreams of your loved ones by buying extravagant gifts.

I’m here to confirm what you probably already know: those spending messages that bombard us over the holidays are garbage.

Five reasons to avoid a Christmas loan

If your credit score is good to excellent and you need to borrow money, assess whether going into debt for a perfect Christmas is the right decision (it probably isn’t). If your score is low (580 or less), here are five reasons why a Christmas loan is a bad idea.

1. They are sometimes a payday loan in disguise

It can be difficult to get a loan from a reputable lender when your credit score is low. Many Christmas loans marketed to consumers with poor credit are nothing more than a payday loan in a Christmas wrapper. Because of the way the interest rate is calculated, you could end up paying 400% interest or more.

2. Even a “legitimate” loan can be expensive

Suppose you find a lender that lends to people with low credit ratings. However, the lender charges an annual APR of 35.99% (not uncommon when your credit score is low). You’re traveling for the holidays and want to spoil the kids, so you borrow $2,000 for 24 months. Your monthly payment is $113 and you will pay $712 in interest. This means your $2,000 loan will end up costing you $2,712. And remember, by the time you paid it back, two more Christmases have passed.

3. The fees will cost you

Whether you borrow from a bank, credit union, online lender, or payday lender, you’re likely to pay high fees that eat away at your Christmas fund.

4. Late Payments Hurt Your Credit Score

Are you willing to risk your credit score to create a Christmas fantasy? Late payments can wreak havoc on your credit score, which can hurt your ability to get a great interest rate when you need it.

5. You will increase your debt

Borrowing usually means heading into the new year with more debt. Do you need additional financial anxiety?

Alternatives to Christmas Loans

Instead of falling for a Christmas loan, consider one of these alternatives.

Pay as you go

Count the number of paydays until Christmas and decide how much you can afford to take from each check to pay for Christmas. Make a list of everything you can afford to buy and divide the list by the number of paychecks you have left. It’s how much you can spend each time you get paid. You might not spend enough to shock and amaze your loved ones, but you can give gifts to the people you love – and do it without risking your financial future.

Take a side scramble

We don’t have much time before the holidays, but market your skills. Can you paint a straight line like a pro? Go online to your neighborhood bulletin board and offer to paint rooms in your neighbor’s houses. Can you create unique gifts (like wooden toys, handmade clothes, or festive tablecloths)? Offer your services. Maybe you can help hang Christmas lights, set up Christmas trees, or babysit while parents shop. Now is the time to step aside and let people know you are available. Use the money you bring to pay for gifts.

Borrow from family

If you have to travel for the holidays and need the cash to get on the road, it’s better to take out a holiday loan from a relative than borrow from a predatory lender. Don’t borrow more than you can afford to repay over the next few months and work out a repayment plan with the person lending the money. Remember, the reason you can’t get a low interest loan from a traditional lender is because you have bad credit. No matter how that bad credit came about (even if it’s not your fault), anyone who lends you money is taking a risk and trusting you to repay the funds. Don’t let them down.

At the end of the line

You’ve heard it before: it’s not the price of a gift that counts. I recognize how trite this sounds, but the truth is that the best gifts I have ever received were handmade or purchased by my husband during the years when we barely had two cents to rub together. After all these Christmases, my most prized possessions are still clay handprints and a wonky clay bowl that my sons made for me.

Why not be honest with the people you love? If you’ve been out of work or business has slowed due to COVID-19, say so. Even if you’re doing well financially, why go into debt to fulfill someone else’s version of what Christmas is supposed to be?

Buy only what you can afford (if at all) and plan a special night with the people you love. That might mean a walk through a neighborhood covered in Christmas lights, then home for a board game. That might mean ice skating on a pond, followed by hot chocolate. You could even have a family sleepover in the living room with popcorn and movies.

Years from now, the people you care about will remember the time they spent with you. Focus on the memories that matter.