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When shopping for the latest toys and gadgets this holiday season, you may find your inbox or mailbox filled with “Christmas Loan” ads promising money quickly and easily.

But such loans can leave a hole in your wallet long after the gift wrap has been recycled. Here is why it is better to avoid the so-called Christmas loans.

It could be a payday loan in vacation wrapping

Christmas loans are often simple payday loans, with high fees that translate into triple-digit interest rates. A $ 1,000 payday loan, for example, may include a fee of $ 100, which works out to an annual percentage rate of 261%.

This type of loan only requires a bank account and income for qualification. They have short recovery periods – a few weeks or months. Lenders take a post-dated check or go to your bank account to collect payment. If you don’t have enough money to pay off the loan on the due date, you may have to pay an overdraft fee.

In contrast, reputable lenders check your credit report to assess how well you’ve managed your loans in the past. They also charge APRs below 36%, which financial experts say is the limit for a loan to be considered affordable.

“Once you start to accumulate debt [through payday loans]it usually tends to skyrocket, ”says Eric Gabor, chartered financial planner and president of Eagle Grove Advisors in New Jersey.

Your information could be “cropped”

The websites that advertise Christmas loans don’t always make the loans themselves. Rather, they can be aggregators who collect personal information from consumers and, without apparent disclosure, sell it to loan companies.

You might think that you are applying from only one lender when you complete an online loan application on one of these sites. In reality, your data is sent to several lenders. This can lead to unwanted marketing emails or calls from companies that you have never heard of, long after the vacation is over.

You pay now – and for the seasons to come

Less toxic borrowing options, including personal loans from reputable banks, credit unions, and online lenders, sometimes come with upfront fees and long repayment periods. In addition to interest, your Christmas loan may include an origination fee of 2-5% of the amount borrowed.

The loan term is typically two to five years, depending on the amount you borrow and your credit profile. You can pay off the loan sooner if you have the cash, which will save you on interest.

Taking a loan now means taking money out of your future self, Gabor says – money that could be used for your retirement, an emergency fund, or other expenses instead.

A better way to give

Instead of buying items from Christmas wish lists, donate a special activity that you can do inexpensively or for free. Spend the day learning a recipe from mom or volunteer together at the local food bank, says Gabor.

If you’re determined to buy freebies, stretch your money as much as you can, he says. Websites like Raise.com or Cashbackmonitor.com can help you by offering discounted gift cards and reporting cash back offers. Some credit cards also offer cash back and shopping rewards on vacation purchases.

As soon as the festivities are over, start saving for next year.

You can save money and increase your credit score at the same time with a credit-builder loan. You “borrow” money from a lender, but the lender deposits your monthly repayments into a savings account.

When the loan is fully paid off as agreed, you get the money back in a lump sum and have one year of on-time payments on your credit report.

FOLLOWING: What is a constructor loan?

FOLLOWING: Payday loans: how they work, what they cost

FOLLOWING: What to buy (and skip) in December

Amrita Jayakumar is a writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @ajbombay.

NerdWallet is a USA TODAY Content Partner providing background information, commentary, and web coverage. Its content is produced independently of USA TODAY.


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