What are the dangers of taking out a “Christmas loan”?

As you worked out the budget for the gifts you plan to buy your loved ones this Christmas, you may have realised that what you want to give them is outside your means.

To make your budget work, you may have considered a payday loan, or a “Christmas loan”. However, is this something you should truly consider? We find out why it may be best to avoid these.

Tip: If you’re struggling to make ends meet because of debt, consider debt counselling.

What is a “Christmas loan”?

According to Deon Nobrega, managing director at Paymenow, a “Christmas loan” is an unsecured loan geared to help people spend on things they want, not need.

They’re essentially payday loans that are marketed “in the Christmas spirit”. People take these loans out in order to pay for their Christmas shopping or to go on holiday with their loved ones.

It offers an instant gratification, which then needs to be paid off in the months to come, and it often comes with a large interest rate.

READ MORE: Scared to get a personal loan? Find out the facts first

Having said this, Bradley Du Chenne, CEO of Hippo.co.za, believes that short-term loans can be helpful if you need cashflow for things such as a medical emergency or to pay upfront for studies.

He points out that it’s best to not take out a short-term loan for non-essential things as it can be costly over time. Repayments are typically calculated at 24.5% interest per annum.

Why should you be cautious? 

Christmas loans are dangerous because they generate bad debt rather than good debt. They will leave you in debt without growing your wealth in the long term.

“Christmas loans are different from a general loan because they are far more dangerous – they are a wolf in wolf’s clothing,” says Nobrega.

He explains that this is because they enable people to spend outside of their budget; in other words, spend money they do not have on things they do not need.

“Christmas loans are made for emotional purchases, not necessities. It encourages the detrimental ‘payday millionaire’ syndrome, which sees people treat themselves on payday, buying what they want with their recent income, and then running out well before their next pay cheque,” says Nobrega.

Du Chenne says that if you take out a Christmas loan, you will have less expendable income per month over the payment term of the loan. This leaves you at risk of not meeting other financial obligations.

Nobrega recommends asking yourself these questions before you decide to take the plunge:

• Is the planned purchase necessary?
• Is the Christmas loan necessary?
• Can you afford to repay it?
• Is there another alternative, like a salary advance?
• Do you know what the interest rate is?
• Do you understand the payment terms?

“Instead of taking out a loan, look at doing a financial overhaul to see where you can cut costs and save towards your Christmas or holiday shopping instead,” says Du Chenne.

If you need a loan for “good debt”, go to this page to find out more.