While holidays are filled with joy and great times with family and friends, your shopping list may be at the forefront of your mind. Spending around the holiday’s increases exponentially, and we’re expected to buy more expensive goods. Many take out a personal loan to help with costs.
The Pros and Cons of a Personal Loan for Holiday Shopping
Whether you were going to use credit cards anyway or you were looking for a way to stretch your money further, there are several positives and negatives that come with using a loan.
Pro: Loans Have Lower Interest Rates Than Credit Cards
Due to their low-interest rates, personal loans are a more affordable alternative to credit cards. For example, you can use one of SoFi’s personal loans and capitalize on their low 6.99% APR. Not only is that interest rate lower than credit cards, but it’s also lower than the 9.58% average.
Con: Low Credit Scores Come With High-Interest Rates
While it’s true that a 9.58% APR is an incredible interest rate for a loan, there’s no guarantee you’ll get that amount if your credit score is low. When applying for any form of debt, your creditworthiness is taken into account. So are your debt-to-income and debt-to-credit ratios.
If you already have multiple loans or don’t make enough money, even a high credit score won’t help you get accepted. You need to appear financially responsible to get the best loan rates.
Pro: Quick Funding and Loan Repayment Periods
Most lenders will approve you for a personal loan the very next day if you’re in good standing. If you provide complete and accurate information on your application, you’ll avoid processing delays and quickly see that money appear in your account. This way, you can shop sooner.
At the same time, loans have notoriously long pay periods, meaning you don’t have to repay the balance for two to seven years. This can be useful if you need time to repay what you borrowed.
Con: Potentially High Prepayment Fees on Loans
It’s a great idea to pay down your debts as soon as possible, but if you prepay your personal loan, you could receive a hefty prepayment penalty. The penalty may be calculated as a percentage of your balance, or it may charge you the interest you otherwise would have paid.
Pro: Borrowers can Receive Small Amounts of Money
Loans are a big responsibility, but personal loans don’t feel as intimidating to pay off. Even if you don’t need thousands of dollars to pay for your holiday shopping, you’ll still qualify for it if necessary. If $1,000 is too much, consider borrowing $500 or what you think you can repay.
Con: Monthly Payments Must be Made in Full
Credit cards usually have a small required minimum you have to pay towards your balance. You can always pay more, but you’re not required to do so. With a personal loan, you’re charged a fixed, equal amount of interest each month. This amount may be too high for some borrowers.
If you don’t pay your monthly payments in full, you’ll be charged a small fee. Most lenders won’t reduce your following monthly payments, either, so you’ll have to make up the money somehow.
Pro: Personal Loan Payments Increase Your Credit Score
By adding a personal loan to your credit report, you improve your credit mix. Your credit mix describes the types of credit you have, like mortgages, car loans, and credit cards. The more types of credit you have, the better your credit score, provided you pay your bills on time.
Credit companies don’t expect you to have one of each type of account, but a wide variety can show lenders you’re responsible. A decent credit mix can help you get a lower interest rate.
Con: Missing or Making Late Payments Impacts Your Credit Score
When credit is used responsibly, your credit improves. When it isn’t, it starts to fall. If you’re taking out a loan because you’re strapped for cash, ask yourself if you can afford monthly loan payments. It’s a bad idea to take on more debt if you’re already falling behind money-wise.