Before taking a holiday loan, how confident are you that it is the right thing to do? It is the yuletide season and sometimes, folks are overwhelmed with expenditure.
While giving is one of the tenets of the holiday, other expenditures tend to crop up. From having to go on a family trip, to hosting lots and lots of visitors, Christmas clothes and whatnot. The list seems to go on.
Many tend to fall back on holiday loans to keep up with the spending. But how safe are they?
What is a holiday loan?
A holiday loan is a personal loan that you can use to pay for holiday-related expenses, including gifts, travel, and large meals.
These types of personal loans are offered by banks, credit unions, and online lenders.
Typically, a holiday loan has a fixed interest rate, fixed monthly payment, and a set loan term, offering a predictable repayment schedule from six months to five years. Some lenders may charge an upfront origination fee to cover the costs of creating the loan.
The origination fee, when it applies, is usually deducted from the loan before the amount is transferred to the borrower.
How do holiday loans work?
Like many personal loans, holiday loans are unsecured and don’t require collateral as long as you meet the lender’s qualifications. However, some lenders may require you to secure larger loans with collateral, such as a vehicle.
As with other types of loans, your income and credit rating typically affect your interest rate, loan amount, and, ultimately, your monthly payment.
Some lenders allow you to pre-qualify for a holiday loan with no impact on your credit score by providing a few pieces of financial information.
Pre-qualifying allows you to compare loan offers based on their terms, interest rates, monthly payments, and origination fees, which can be as high as 10% of the loan amount. Each of these costs affects the overall cost of the loan.
Of the options available, holiday loans from credit unions may be more attractive, as long as you’re a member in good standing. Some credit unions offer lower interest rates or don’t require a credit check.
Advantages of holiday loans
Despite putting you at risk of getting into debt, holiday loans do have a couple of advantages.
Some of them are listed below.
Pre-qualify without affecting your credit
Many lenders allow you to provide a few pieces of information and learn whether you’re pre-qualified for a holiday loan. Pre-qualifying makes it easier to find the best loan without impacting your credit score.
Lower interest rates
In some cases, the interest rates on holiday loans may be lower than the average personal loan or payday loan. This in turn saves you money on interest.
Fixed monthly payment and loan term
A set repayment schedule makes it easier to budget and gives you a firm timeline for paying off your loan.
Disadvantages of holiday loans
Naturally, holiday loans in Nigeria also have certain disadvantages.
Listed below are some things to consider before taking that holiday loan.
Potential upfront fees
Some lenders may charge an origination fee, which may increase the amount you need to borrow and the amount of interest you pay overall.
Potentially high-interest rates
If you have a low credit score, the chances are that the interest rates you will be paying for holiday loans will be high.
The rates are often based on your credit rating. A low credit score may limit you to paying higher interest, which increases your monthly payment and could make the loan more difficult to afford.
Increased debt load
If you are not careful, borrowing for holiday gifts adds to the amount of debt you’re carrying. A high debt load can impact your credit score and increase your interest in future loans.
Collateral may be required
Depending on what you are taking the loan for, collateral may be required by the lender.
If you accept the loan, you risk losing your asset if you fall behind on payments.
Things to consider before taking a holiday loan
Since you have decided to go for the holiday loan, there are some things you need to consider before taking that leap.
It is important that you get a holiday loan with a fixed monthly repayment. Most lenders now offer this, although there are some short-term lenders who offer a repayment schedule where your repayments are largest at the start, and they decline in size with each payment.
Make sure you know all of the charges upfront
In taking out a holiday loan, looking at the interest rate you’ll be paying gives you an idea of whether the offer you have is a good deal or not.
If you fall behind on repayments on a loan, many lenders’ terms and conditions allow them to charge you extra fees – like default charges. Do thorough research before choosing a loan.
How would you be paying back the loan?
When it comes to paying back your loan, it’s always best to be absolutely certain of where the money is going to come from before you take out a holiday loan to make the repayments.
If you are in any doubt about your ability to make all repayments in full and on time, it’s safer not to apply for a holiday loan.
Effect on your credit rating?
If you do make all of your repayments on time and in full, you may see that reflected in your credit rating which may improve once your holiday loan is settled.
However, please do bear in mind that if you default on your loan and you’re unable to pay it back, you will find it very difficult to borrow money with low interest.
Save up for your holiday instead
Instead of taking a holiday loan and raking up some debts, you should consider something proactive like saving up for your holiday expenditure.
It goes without saying that you should never borrow more than you need to borrow to pay for your holiday. The more you borrow, the more interest you pay back.
If possible, try and use that much amount from your savings that you can comfortably afford towards your holiday and then go for a holiday loan to fund the balance.
You will always pay more interest on a loan than you’ll be paid by your savings account provider. So, while it may be nice to have as large a balance in your savings account as possible, if you don’t use some of your savings to pay for your holiday, you’ll be losing out financially.
Tips to consider before taking a holiday loan
Whether you have a great credit score or not so good credit score, nairaCompare is here to guide you through whatever decision you decide to take.
At nairaCompare, we match holidaymakers looking for a loan to the right lender.
Below are some tips that may guide you in your decision to take a holiday loan.
The Buy Now, Pay Later (BNPL) option
Financing your holiday with BNPL purchases allows you to make short-term, fixed instalment payments. Sometimes, they require no upfront credit check and no impact on your credit as you repay the loan.
Many retailers offer BNPL as a payment option that allows you to pay off your balance, usually over bi-monthly or monthly payments.
Reduce your holiday budget
You may want to consider reducing your holiday budget, especially if the bills are getting overwhelming.
By narrowing your list, you can get all of your shopping done with the cash you have. Tightening your holiday budget may mean buying fewer gifts or shopping for fewer people, but it will keep you from taking on more debt.
Take on temporary holiday work
It’s a holiday and you probably have time on your hands. Of course, you would want to spend quality time with family, but those bills won’t pay themselves.
Consider applying for a temporary holiday job. It could be something you can do remotely. That way, you still have the option of spending time with family.
Bringing in extra cash would give you the flexibility to spend a little more on gifts without having to borrow money.
Set up a limit on your spending habits.
This would help control your expenditure thereby reducing or totally eliminating your need for a holiday loan.
Also, create a 10% margin on these funds for contingency expenses or any overshooting of expenses as the loan approval and disbursal will be done only once.
Borrow within your limits
Put your repayment capacity into consideration before opting for a holiday loan in Nigeria.
Note that the whole idea is to relax and have fun, and not to impress anyone. If you spend above your means during the holidays, you will end up stretching your monthly budget and increasing the chances of default at the time of repayment.
Remember, bills don’t go on holidays. You will still meet them after the yuletide.
Keep the repayment tenure as short as possible
In balancing your holiday loan with your monthly budget, a longer term means a more expensive loan. So, try to keep your loan tenure short so as not to incur extra interest.