Christmas is at the door again and as usual, it is pretty much to be arranged. It should be Christmas presents, Christmas food, Christmas decorations and spruce, Christmas cards and toys plus a lot of other little things. On top of this, maybe you should travel away or get guests who should have food, etc. All this can be cashier faster than one would like and some are tempted to borrow.
The classic question is whether this is how to handle the higher costs that Christmas entails, especially when it comes to Christmas gift purchases. Many people probably borrow money to get an extra supplement in the cash register so that they can afford, but this also means that you have to pay back in the coming months at the beginning of the year plus pay interest.
How should you do when Christmas comes and the expenses increase?
The best thing I can do is to have a decent saving throughout the year, which you can then take away when Christmas comes, if you now feel the need. Some of course have such good pay and such large margins that they do not need extra money to pay for Christmas, but it is clearly more common that you need extra money.
By saving money during the year, you create stability and security in your finances, because you have extra money available. Then you do not have to worry about whether you can afford everything and you do not need to borrow or skimp.
You can advantageously have a special Christmas savings where you spend a certain amount each month, which goes specifically to Christmas. To decide how much to spend each month, you need to weigh in on what the Christmas party can go to, how much you probably need to spend in addition to what you get after November’s salary plus how much you can afford to spend for the other months.
Why should you avoid borrowing?
It is not horrible to borrow money for eg Christmas but it is unnecessary because it creates a little extra strain on your finances as you get an extra bill to pay after Christmas. Having a loan is never the best solution, because it costs money and there is a risk that you cannot afford to pay.
Since there is always interest on loans, what you spend on Christmas will always be more expensive overall when you borrow. You pay interest on the amount and the time you borrow, so the more you borrow and the longer the maturity you have, the more it costs you. If you were to borrow USD 10,000 for a year with an interest rate of 10 percent, this would be USD 1,000 extra in interest costs. So your real cost is then USD 11,000 for Christmas.
In addition to being more expensive, we also have the increased expense each month when you have to repay the loan (amortize) plus the interest rate. The loan of USD 10,000 would mean that you have to have about USD 900 each month to pay off. If you have a strained economy or small margins, this amount can mean a lot.
If you compare to save for Christmas and to borrow and then pay off after Christmas, it is actually quite similar in such a way that in both cases you have to spend money every month. But with the loan, it is compulsory and interest is paid. When you save, you can pause the saving at any time if you realize that it is an extra scarce month or if an unexpected expense interferes with your budget. You cannot do that with the loan payment. So little planning makes a big difference.
If you still want to borrow, what should you think about?
In some cases, you may still think loans are the best way to go. Still, it’s up to everyone to decide. If you are interested in borrowing, we can give you some short tips that make it a little better and safer.
Choose the right loan. Do not take an unnecessarily expensive loan. Check around for private loans with good interest rates and drive on it. Avoid the most expensive loans like SMS loans and quick loans, which have too high interest rates to be sensible alternatives.
You can always repay a loan in advance if you want. You can thus obtain a private loan with a repayment period of 1-2 if you feel like it, even if you would not want to keep the loan for so long. If you get extra money you can pay extra, at no cost.
Consider credit cards if you know you could pay off all the extra costs next month. Many credit cards have interest-free credit up to 30-45 days, ie between one invoice and the next. If you buy on the card before Christmas (not too long before) then you will probably receive the invoice for example in the middle of January and it should be paid in early February. As long as your income covers the credit then it is quiet, then you have received an interest free credit. Otherwise, it can be a bit expensive, so plan well.
Set up a budget before Christmas so you don’t spend too much. It is always good but especially if you borrow. Try to keep costs down if you have to borrow, as it costs some extra in interest, etc. If you don’t have the money, you should be a little more frugal with them.
Check around among lenders and banks and choose a cheaper loan. You may need to look up what interest rate you can get to find the best loan. For example, you can use a loan broker who collects many lenders under the same roof. It will then be easy to apply and compare for loans.
The cheapest option is to mortgage your home if there is space. It may not always be worth doing this to borrow USD 10,000 for Christmas only, but consider the alternative. The interest rate on this loan is around 1.5 percent compared to private loans where you often have to pay over 10 percent instead. There is a real difference.