Should You Take Out a Personal Loan to Pay for the Holidays?

Although many of us are still putting together last-minute costumes for Halloween and refreshing our candy supplies, the winter holidays will be here before we know it. And that's apt to be a pretty expensive time of the year.

The average consumer is expected to spend $875 this year on holiday gifts and purchases, according to the National Retail Federation. And if you don't have that kind of money sitting in your savings, then you might assume that your only choice is to borrow it.

You could charge your holiday purchases on your credit cards and pay them off as you can. But a personal loan might give you a lower interest rate on your debt, so you may be leaning toward that option. Is it a good one, though? That's questionable.

Now's not a great time to borrow

The Federal Reserve has been raising interest rates in an effort to cool inflation. Because of that, borrowing has gotten expensive across the board. Everything from a car loan to a home equity loan costs more these days, and personal loans are no exception.

Even if you're someone with excellent credit, you may find that the rate you're eligible for on a personal loan is higher than expected. Granted, it may be much lower than what a credit card will charge. But that doesn't make today's personal loan rates competitive by any means.

How much might a personal loan cost you in interest? It depends on your loan's rate, the sum you borrow, and the length of time it takes you to pay that money back.

If you borrow $1,000 at 9% and pay it off over three years, you'll end up spending about $145 on interest. With a five-year repayment period, you're looking at about $245 in interest.

Does a personal loan make sense given the amount you're looking to borrow?

There's administrative work that goes into putting a personal loan in place. As such, lenders tend to impose borrowing minimums.

If you're looking to spend somewhere in the vicinity of $875 on holiday purchases, you may not be able to borrow that small a sum with a personal loan. Lenders typically impose larger minimums, such as $2,000, though it may be possible to find a $1,000 personal loan.

However, since most lenders don't write such small loans, you may be limited with choices. That gives you less leeway for shopping around and finding a competitive rate.

A better solution for paying for holiday purchases

A personal loan might seem like a good idea if you need a modest sum of cash to cover your holiday costs. But a better bet may be to work a side hustle during the holiday season to come up with that money instead.

Any time you borrow money, you run the risk of falling behind on payments and wrecking your credit. And since borrowing rates are expensive these days, you're going to be looking at a lot of interest no matter what.

Many businesses need more help during the holidays, so if you're trying to drum up $875 for your purchases, that may be doable if you hold down a side job throughout November and December. That way, you can close out the holidays without the weight of debt dragging you down.