Just hearing the words “Black Friday” can generate a frenzy among hardcore shoppers. The holiday season represents a unique potential financial landmine because of the high emotions that run during the festive months of October, November, and December.
But no matter how great that new LED TV looks in your family room, digging yourself into a financial hole during the holidays isn’t smart. You will start to feel the pain before you even have had a chance to break your New Year’s resolutions – and you will continue to suffer under the burden of holiday debt for months, if not years.
Holiday Payday Loan Hazards
Payday loans represent a significant danger all year round, but are especially insidious during the holidays. It can be difficult to resist the temptation of the “easy” money to be had through holiday payday loans. Holiday travel, family meals, party ensembles, and all those gifts – the costs add up rapidly. But payday loans represent some of the most expensive credit available, with short repayment periods and interest rates that run into the hundreds in percentage points. A relatively modest holiday payday loan of $1,000 can mushroom into five figures if you don’t repay it immediately in full, with payments that could demand chunks of your hard earned money for years.
Credit Union Loans
If you’re convinced that you must borrow during the holidays, seek out a loan administered by your local credit union. The payment terms are much more favorable than payday loans and the interest rates are infinitely more reasonable. You will have months rather than weeks to repay (which could be good, or bad), with interest rates in the single digits or teens. Of course, you must be a credit union member to qualify for a credit union holiday loan. However, there are so many credit unions around based on residence, alumni status, employment or organization membership that you are almost certain to be eligible to join at least one credit union in your area.
If you decide to go the credit union holiday loan route, look for a loan with the lowest possible interest rates. But long repayment rates can be a double-edged sword. Stretching out the repayment period means that you remain in debt that much longer. Therefore, take out the smallest loan possible, and make a commitment to repay the loan in full in months rather than years.
Holiday Layaway Plans
Once a relic of the past, layaways are back. Purchasing your holiday gifts on a layaway plan can be a viable alternative to expensive holiday loans or maxing out your credit cards. However, all layaway plans are not created equal. Read the fine print, and beware of layaway plans that feature steep layaway fees and tricky terms that dictate that you will lose any payments that you’ve made if you change your mind about your purchases, or if you are unable to pay off your layaway in full within a specified period of time.
Escaping the Holiday Loan Debt Trap
You will need discipline to avoid the holiday loan trap this year, or the debt hangover next January. Be blunt with family and friends about your financial plan this season. It’s not necessary to disclose blow-by-blow details, but if you’re feeling the financial pinch, let your loved ones know that there will be fewer gifts or homemade gifts from you this year. If you cannot afford to travel to take part in the annual family get together, say so sooner rather than later to minimize hurt feelings. Offer to host a holiday pot luck dinner as an alternative to allow everyone to get together.
As you economize on your holiday plans for this year, begin to lay the groundwork for a brighter holiday next year. Start a Holiday Club savings account and commit to making monthly, if not weekly contributions. Take advantage of post holiday sales to shop for decorations and gifts for the coming year – and pay for everything in cash. The discomfort you feel now will be long forgotten next year when you are free to fully express your festive holiday spirit – without the anxiety of dreading the onslaught of bills in January.
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.