Will Your Holiday Cheer Turn into New Year's Tears?
A warning on short-term funding "solutions" for holiday spending
A recently released survey shows that roughly half of Americans are taking on new short-term debt this holiday season in order to finance gift giving.
The survey, by DebtHammer, reported:
About 50% of shoppers are planning to take on new short-term debt this year during the Christmas season to cover their extra costs and getting through the season is taking a toll on emotional health.
Spending is again expected to hit new highs, meaning shoppers will be taking on billions in short-term debt.
The National Retail Federation is forecasting that holiday retail sales during November and December will grow between 6% and 8% over last year, to between $942.6 billion and $960.4 billion. And that’s after last year’s $889.3 billion shattered previous records.
How will Americans pay for all this debt?
Most consumers say they plan to use a credit card to finance holiday spending and will carry the balance into 2023.
DebtHammer’s survey also notes that Buy Now, Pay Later is a popular option:
13% plan to use “Buy Now Pay Later” plans, which require paying an item in four (or sometimes more) installments. Another 8% are planning to use payday loans or title loans, and 7% will use personal loans.
While Buy Now, Pay Later can seem like an easy way to manage extra holiday costs, users should be aware these short-term loans do come with some drawbacks.
In fact, one recent survey indicated that 1 in 5 BNPL users later regretted the decision to use the product.
According to that same survey:
32% of Buy Now Pay Later plan users have had to skip paying an essential bill such as rent, utilities or child support in order to make their payments. Even after that, 30% report that they’ve struggled to make their payments.
Another popular way to finance holiday debt?
Cash advance apps like Dave.
Should You Get a Short-Term Loan from the Dave App? | by Andy Spears | Medium
The DebtHammber survey notes:
Almost 9% of consumers will get a paycheck advance from an app like Dave.
Borrowers should certainly beware of the friendly cartoon bear that is Dave’s mascot.
One story from the L.A. Times takes a deep dive into the Dave app, explaining just how bad the fees associated with these short-term cash advances can be.
Here’s how the Times broke down the fees associated with a loan from Dave:
Given that the money had to be repaid in 12 days, the $5.99 fee and $2 tip, if considered as interest, cost Goad 122% on an annual percentage rate basis — a metric that helps compare the relative cost of loans. If he tipped $6.93, the company’s average in the first quarter, it would amount to an APR of nearly 200%. If he chose a 15% tip, the total cost would rise to $35.99 with an APR of 547% — corner payday loan territory.
With interest rates from 122% to 547%, it’s no wonder holiday debt now is likely to turn into a very stressful start to 2023.
One way to avoid the stress of holiday debt is to save in advance of the season. However, DebtHammer’s survey notes just 29% of American consumers save up during the year to pay for holiday spending.
The bottom line:
Not only can holiday debt hit your budget hard in the new year, but it can also lead to stress.
The survey indicates that the stress of the holiday season impacts consumers now and will likely do so into the start of next year.
Respondents cited a range of stress responses:
About 53% cite constant worry, 31% can’t sleep, another 31% have already cried due to holiday stress, 24% experience mood swings, 23% overeat, 23% have stress-purchased items they can’t afford and 12% have consumed alcohol.
“Going into debt due to holiday spending has major drawbacks for your mental health,” said Maryam Kia-Keating, Professor of Clinical Psychology at the University of California, Santa Barbara Department of Counseling, Clinical, and School Psychology.
“When people spend more than they have, or go into debt, their stress multiplies,” she said. “Financial stress often increases conflict in family relationships, because of the spending itself when partners don’t agree, or because of the sacrifices involved in trying to pay back the debt.”
Want to avoid the stress of holiday buying?
Set a budget, stick to it, and avoid those easy, convenient apps or buy now, pay later plans. These short-term solutions often lead to long-term pain.
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