If you’ve found yourself in vacation debt this year, you’re not alone: More than 1 in 3 Americans (36%) have incurred vacation debt this year, averaging $1,249, according to LendingTree. Plus, it’s often difficult to pay off that debt: A recent NerdWallet survey found that 29% of shoppers who put gifts on a credit card in 2020 carried that debt through that year.
An option to pay off that holiday debt that could save you money? Getting a personal loan, although it can be risky. If you have good credit, a personal loan can be a much more affordable way to finance your vacation purchases than a credit card. “If you can qualify for a personal loan of around 5% or 6%, that’s a lot better than the average credit card, which charges over 16%,” says Ted Rossman, senior industry analyst at CreditCards. com. And a personal loan can make even more sense if you’re consolidating other high-interest debt, like consolidating loans and credit card debt. That said, it’s not the right option for everyone, and there are risks. Here is what you need to know.
See what rate you might qualify for
Since personal loans can help borrowers access a significant amount of cash, sometimes at a relatively low interest rate, Jacob Channel, senior economic analyst at LendingTree, says they can be a good way to cope. to high interest holiday debt. But it depends on the rate you can get: while someone with excellent credit may get a rate of 5 or 6%, others may be offered more than 20%.
Get multiple quotes
“If the holidays come and go and you have a big card balance, do a little research and use a debt consolidation calculator to see if consolidating will save you money. If you’re shopping for a personal loan, pre-qualify with a handful of lenders to get an idea of the rate and loan amount you’ll qualify for,” says Annie Millerbernd, personal loan expert at NerdWallet.
Don’t forget the fees
Another thing to consider when taking out a personal loan is the fees. “The fee to watch out for is the set-up fee,” says Millerbernd. “Personal lenders who charge origination fees often take a percentage of the amount you borrow from the loan before it reaches your account. This is something to consider if you’re trying to borrow a specific amount, because with origination fees you could find yourself short a few hundred to a few thousand dollars,” says Millerbernd.
Don’t use a personal loan for the wrong reasons
While personal loans, if you get low rates, can be useful for tackling high-interest debt, Millerbernd notes that they’re a big 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 more,” says Millerbernd.
Don’t use a personal loan as a band-aid
If you’re someone who’s “considering using a personal loan as a temporary band-aid to free up credit card limits for extra spending,” Channel says you should “consider other options such as credit counseling. Instead, use a personal loan to save money and build better financial habits in the future.
Consider alternative solutions
Another, possibly less expensive, way to pay off holiday debt is to use a 0% interest balance transfer card. “It will give you a few interest-free months to work on your debt, which can take the pressure off. You need strong credit to qualify, though,” Millerbernd.
Set a budget to avoid needing such loans in the future
Channel says the best way to deal with holiday debt is to stay organized and diligent about paying it off. If you take out a personal loan, you’ll need a plan to pay off that personal loan — “look for debt repayment strategies like the snowball and avalanche methods,” Millerbernd says — and avoid spending more than you can afford. can you afford it. credit card. This type of planning can be incorporated into your budget.
Make a different plan for how you will handle vacations in the future
“I’m not a big fan of taking on retail or holiday-related debt. I’d rather see people avoid going into holiday debt. Maybe there are less expensive ways to celebrate, like buying fewer gifts or giving homemade gifts,” says Rossman. So in the future, set a good budget and stick to it. “Maybe you and your family can only buy for the kids…or maybe you can create a Secret Santa and buy for another person instead of the whole group. You can also give time as a gift — offering to babysit your sister’s kids so she and her husband can go on a date without having to pay for a babysitter,” says Rossman.