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Loans

A personal loan can deliver quick cash to cover holiday expenses—but a CFP suggests you do this first

Millions of Americans are struggling to stay afloat during the holiday season. CNBC Select reviews what you should first consider before taking out a personal loan.

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The season of giving is good for the heart, but even in normal times it can be a burden on your budget.

This year feels more difficult though, with millions of Americans struggling to stay afloat during the holiday season and worrying about how the return of student loan payments and/or the end of extended unemployment benefits could impact their finances going into 2021.

Yet even though Americans are cash-strapped, the National Retail Federation predicts that holiday spending might grow by as much as 5.2% this year, in spite of consumers' plans to spend less due to the 2020 recession.

If your holiday spending is higher than usual this year, you might be tempted to take out a personal loan to help cover the costs. LightStream, for instance, offers personal loans with flexible terms for people with good credit or higher, and the cash can be delivered same-day if you complete an online application on a banking business day, get approved and electronically sign/verify all the necessary information by 2:30 p.m. ET.

But keep in mind that even the best loans come with interest charges, and they shouldn't be your first choice for accessing fast cash unless it's absolutely necessary.

CNBC Select spoke with Nashville-based certified financial planner Jeanne Fisher about how you should protect your big-picture financial health before you submit a loan application.

Consider why you need the loan

It might seem obvious, but if you're taking out a loan to cover your holiday costs, you're putting yourself at risk of taking on too much debt. Using a loan to help you keep your business open or fix a leaky roof is different than using one to go on vacation or overspend on gifts.

"If you have to borrow money for holiday shopping, then you're spending too much," Fisher tells CNBC Select.

That said, this year has been hard for everyone, and it's OK to take your emotional needs into consideration, says Fisher. You shouldn't deprive yourself of holiday joy this year just because money is tight.

"If the answer is always 'no, no, no, don't spend,' it's not sustainable," she says. "The realistic way to approach it is to know that you're going to prioritize certain wants over others. There are going be people who prioritize holidays. And that's OK as long as you're being responsible in other areas."

If making this holiday season memorable is important to you, consider whether you're willing and able to pay interest charges over the lifetime of the loan. If not, look to other areas to stretch your budget.

Other ways to find cash to cover holiday expenses

Even though it's OK to prioritize happiness, it's still never preferable to finance your purchases at high interest rates, says Fisher. "I think sometimes people's first thought is wanting to borrow money, but a better question is 'how do we increase revenue?'"

Before you take out a loan for holiday spending, see if you can earn the extra cash yourself or find ways to finance interest-free. Here are some options to consider:

Sell items you aren't using

Chances are, you've got some items in your house that you don't use anymore and could be sold on Facebook Marketplace, letgo or Offer Up.

"I'm a Facebook Marketplace person," says Fisher. "I love to sell things online."

Even if you sell items for as little as $5 or $10, it can add up quickly and you can use that extra cash to offset your Christmas costs.

"It's super easy to [sell things online] with your smartphone," says Fisher. "It just takes a little bit of effort. If you're sitting there and you're like, 'I really want to go see my family for the holidays, and I know my plane ticket is going to cost $400,' walk around your house and figure out what can you sell to get to that number."

You can also do odd jobs: "Offer to rake your neighbors leaves or wrap an aging relative's Christmas presents for them. Plenty of moms need help tutoring their kids right now. Maybe you offer a couple of hours a week to help one of your friend's kids do their homework."

Use up those credit card points

If you're tight on cash, consider cashing in your credit card points for gift cards for yourself or as a gift for someone else. Gift cards are one of the simplest redemption options to choose in your credit card's rewards portal. Just log in to your account, click the link to redeem rewards, and select the gift cards you want.

Issuers typically set minimum redemption amounts for gift cards, usually $25. There's often a wide selection available, including major retail stores, such as Sephora, Macy's and Bloomingdale's; electronics stores such as Best Buy; restaurants such as The Cheesecake Factory; and more.

You could also use your points to buy items on Amazon.com and other major retailers. You might not get the highest redemption value this way, but it's a nice option when cash is tight. (Learn how to do all of your holiday shopping with credit card rewards.)

Earn more points for streaming at home: The Wells Fargo Propel American Express® Card is a well-rounded card that offers unlimited 3X points per dollar spent on dining out, ordering in, travel, and a number of streaming services, including Apple Music, Hulu, Netflix, Pandora, Sirius XM Radio Inc. and Spotify Premium.

If you don't have the money for a plane ticket home for the holidays, ask someone to gift you the ticket using their travel rewards. Many credit card users are hoarding their points and miles this year, with travel at a near-standstill. Chances are, someone in your family or friend circle has extra points they'd be happy to use to buy your flight home as a gift.

0% APR credit cards

If you have a good or excellent credit score, consider applying for a credit card that offers promotional 0% APR on purchases. That way, you can pay for this season's purchases in small, monthly payments well into 2021. Just make sure you have a stable source of income and you're confident in your plan to pay off the charges before the promotional window expires.

The Chase Freedom Unlimited® Card comes with 0% APR for the first 15 months on purchases (then 14.99% to 23.74% variable APR). If you spend $800 this holiday season, you'd need to make monthly payments of about $54 to pay it off within the 0% APR period.

Check out our list: Here are the best 0% APR credit cards for financing big purchases over time.

A loan from family or friends

If you have the ability, ask a family member or close friend to borrow cash before turning to a personal loan. Make a payment plan in writing, says Fisher, and make sure both parties sign it. Honoring this agreement is of utmost importance for the sake of maintaining a good relationship.

Get your family on board with spending less

If money is stressing you out this season, the solution may be as simple as speaking up. Chances are, your family and friends are feeling the pinch, too. It would probably be a welcome relief to remove the pressure and agree to a low-key holiday this year, says Fisher.

"I think now more than ever people are more understanding of what a tough year it is," she says. Instead of hosting a lavish dinner, ask the people in your bubble to come over for a down-to-earth and affordable potluck. Before you try to buy everyone in your family gifts, suggest that you draw names for a secret Santa so that each person only buys one gift.

It might be uncomfortable to admit at first, but honesty could be very beneficial to you, your loved ones and your wallet.

Don't miss: A financial therapist shares her psychological trick to save money this holiday season

Bottom line

Before you borrow money to pay for your holiday expenses, think about other creative ways that you can pad your budget. It might seem like more effort to find a seasonal job or side hustle, but consider whether that's more or less stressful than being on the hook to pay back a personal loan with interest for the next several months or years.

If you still decide on a small personal loan to hold yourself over, look for one that charges low APR and no origination fees. Borrow the smallest amount you need so that you can avoid going deeper into debt.

Need a small loan?: Most lenders have a $1,000 minimum for loans, but you can get a $500 loan from PenFed and pay it back within one to five years, depending on your application. (You don't need to be a member to apply, but you will need to sign up for a PenFed membership and keep $5 in a qualifying savings account to receive your funds.)

Information about the Wells Fargo Propel American Express® Card has been collected independently by CNBC and has not been reviewed or provided by the issuer prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.