Christmas is an expensive time in any ordinary year, but, this year, the effects of the credit crunch mean that an average British family will spend nearly £300 less than last year, according to a recent survey. The unwillingness of banks and other financial institutions to lend money to each other, or, indeed, to anyone with a less than perfect credit history, means that many consumers face rejection when it comes to applying for loans, credit cards, etc., to cover the cost of Christmas. A poor credit rating – usually, but not always, the result of late payments, or defaults, on credit cards, or loan agreements, etc., in the past – can be a distinct handicap when it comes to securing credit at competitive interest rates, but does not mean, necessarily, that credit is completely out of reach. Indeed, in the current economic climate, "bad credit", or "sub-prime", loans are becoming increasingly necessary, such that there are many lenders who specialise, solely, in these products. It may therefore be possible to secure a short-term, "Christmas" loan at a reasonably competitive rate, albeit higher than that available to borrowers with average, or better, credit ratings.
Christmas Loan Considerations
If you are considering taking out a Christmas loan to cover the cost of presents, entertaining, etc., it is advisable to establish your budget – based on the number of people you are intending to buy, or cater, for, etc. – beforehand. It may also be worth your while to obtain a copy of your credit report – available for a small fee from credit reference agencies, such as Experian, or Equifax – so that you can see, in black-and-white, the extent of the damage caused by previous borrowing. If you find any inaccuracies, or entries that do not relate to you directly, you have the legal right to approach the organisation(s) concerned, and have these corrected, or removed.
Christmas loans for small amounts typically operate in a similar way to so-called "payday" loans available all year round; a borrower borrows, say, a few hundred pounds, and repays that amount in fixed monthly payments over a fairly short period, typically 6 months, or so. Loans of this type are typically "unsecured" – that is, they require no collateral, in the form of your home, or other assets – and, if you shop around, may be available at interest rates lower than some credit cards.
You should, however, approach only reputable lenders for a Christmas loan, even if you have a poor credit rating. If you are in a precarious situation, financially, it may be tempting to take advantage of so-called "doorstep lending" – often with weekly repayments, collected in person, by a debt collector – in the form of a cash loan, gift vouchers, or a prepaid gift card.
However, depending on the total amount that you borrow, and the repayment term, this form of borrowing may entail an APR ("Annual Percentage Rate") of 150%, or 200%, or, in other words, anything up to ten times that of a typical credit card. There have been a number of high-profile cases, just recently, of major high street retailers disassociating with this type of scheme, for precisely this reason.
So-called "logbook loans" – secured against a car, or other vehicle – are even less attractive, typically requiring you to sign ownership of your car over to a specialist company in return for a loan at an APR of 300%, or more; logbook loan companies are also not bound by FSA ("Financial Services Authority") regulations with regard to the fair treatment of customers.
Worse still, of course, is the illegal practice of "loan sharking"; unscrupulous, unlicensed individuals may offer "no questions asked" loans with no security, but interest rates – if, indeed, they are made known at all – are extortionate, and borrowers may be under threat of physical violence if they fail to make repayments.
It may also be possible to obtain a bad credit Christmas loan for a larger amount, up to, say, £25,000, or more, but such a loan is likely to be "secured" on your home, or other major assets. This is obviously a major commitment, repayable over a term of years, rather than months, and should only really be considered if you are certain that you will be able to keep up repayments, after Christmas, and for the foreseeable future. Your home may be at risk if you cannot keep up the repayments on any loan secured on it.