Why the 4 Most Common Loans for Holiday Debt Are a Danger to Your Finances
Written by
Tina Nazerian
Edited by
Zuri Anderson
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Holiday shopping kicked off on Black Friday for many people. As Americans continue shopping for their family and friends this month, they might be taking a hit to their finances during a year when many are getting by paycheck to paycheck. According to a new survey from Debt.com, out of 1,000 Americans asked, 66% said they will “‘go into debt for holiday shopping.'”
Michael Neuenschwander, certified financial planner (CFP) and the founder and principal owner of Outlook Wealth Advisors in Houston, told GOBankingRates in an email that he finds this news “troubling.”
“Much of that debt is likely to be charged to credit cards, which currently have an average APR of just over 24%,” Neuenschwander wrote. “That kind of drain on your finances can be very hard to overcome, especially if you only make minimum payments or, worse, miss payments. It’s better to avoid going into debt whenever possible.”
Neuenschwander broke down the most common loans for holiday debt, how they can potentially ruin your finances and what you can do to prevent it.
The Drawbacks of Holiday Debt
Neuenschwander explained the ways debt can harm one’s life.
“With credit cards charging an average of just over 24% interest, it’s a good practice to look at that information in a different light: Is there an investment opportunity where you can reliably make 24% returns?” he wrote. “There isn’t, which is why it’s so important to avoid debt whenever possible: It’s very difficult to make up the financial impact of those interest rates.
“Too much debt or missed debt payments can also impact your credit rating. That can make it difficult to get loans for large purchases like a home or a car and can even in some cases affect your prospects with some employers.”
He noted that debt can cause stress, as well.
“It’s hard to avoid feeling anxious when you know you owe a lot of money,” he explained. “Think about whether that extra present is worth months or even years of worry as you work to repay your debts.”
Common Loans During the Holidays
The survey also uncovered that in response to the question, “if AI ‘recommends ideal gifts for your loved ones, will you spend more to finance your holiday shopping?'” Sixty-five percent of respondents said that they would.
Specifically, 80% indicated turning to credit cards, 65% to buy now, pay later (BNPL), 59% to retail store credit cards and 58% to payday loans to finance AI-recommended gifts this holiday season. For Neuenschwander, an AI holiday gift recommendation isn’t a reason to go over budget.
“I think we should work hard to stay within our holiday shopping budgets no matter who — or what — is recommending that we buy specific items,” Neuenschwander stressed. “If you can’t fit something into your budget, it’s a good practice to resist advice to buy it anyway.”
He added that the four loan types many shoppers will turn to so they can finance AI-recommended holiday gifts are “all debt.”
“Buy Now, Pay Later in particular is often considered not to be debt, because it often doesn’t charge interest,” Neuenschwander emphasized. “However, it’s still money that you owe someone else, and if you forget or are unable to pay them back, the penalties and damage to your credit score could do lasting harm to your finances.”
How To Avoid Holiday Debt
Instead of going into debt to purchase holiday gifts, shoppers can balance gift-giving with safeguarding their personal finances. Neuenschwander advised forming a holiday spending plan.
“First, consider how much you can comfortably afford to spend on presents this year,” he explained. “Then, write a list of everyone you want to buy gifts for and determine how much you will spend on each person, making sure the total isn’t more than you can afford.
“Don’t forget to include yourself in that gift list! Set aside some money for your own savings to help you stay out of debt if faced with an unexpected expense. Then, stick to that plan.”
If shoppers spot presents that are over their budget, they should buy something else or think about gifting their time instead, Neuenschwander emphasized.
“Offer to watch the kids for a night while your friends enjoy a date night,” he wrote. “Gestures like that can be worth much more than material items!”
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