Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Oct 26, 2012

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Once again, Christmas will be here before anyone realizes it. Time flies and the holiday season will soon arrive. While everyone loves a good holiday, it is sobering to remember that due to ongoing economic difficulties, not everyone can spend as much as they would like to during what should be times of joy.

Sadly, the recession has made it all too common for families to cut back on the presents they purchase for others. Similarly, the iconic American Christmas meal with turkey, stuffing, mashed potatoes and a host of other delectable sides can equate to a lot of money. In such circumstances it is only natural for families and breadwinners to want to borrow money so that they will be able to give their loved ones special holiday memories. While some borrowers are wise enough to seek out financing with reasonable interest rates, not all borrowers are so well-informed (or well-equipped), and may end up making the costly mistake of seeking short-term financing.

News stories about payday loans are rife with reports of borrowers being swindled by unscrupulous lenders or misunderstanding the debt they agreed to. One such borrower was computer assembly technician Anita Monti from Raleigh, North Carolina. As a grandmother, Anita loved her grandchildren and would no doubt do anything to see them happy. In 2011, as Christmas approached, she desired some extra money to help pay for gifts for her grandchildren. After overhearing a co-worker mention payday loans, she eagerly applied for one and was approved. Unfortunately, she was quickly saddled by the debt and unable to repay it.

“I felt like I was in a stranglehold each payday. After awhile, I thought, I’m never going to get off this merry-go-round. During this time, I got a promotion and a raise, but I never saw any of that money. It all went to pay their fees. I got behind on rent and had to pay late fees,” said Anita in an interview with Responsible Lending.

Things eventually got so bad for Anita that she was forced to seek help from her church in order to pay her rent. She later worked with a credit counselor in order to work out a payment plan with her lender. In the end, she paid $1780 for a $700 payday loan—a massively profitable arrangement for the lender, and a massively costly blunder on her part.

Anita was no doubt just one of many payday loan borrowers who sought some help with Christmas expenses in 2011. Unfortunately, since there has been minimal if any improvement in the world economy, we will likely see a repeat of the same kind of borrowing practices come this Christmas.

In the UK, where payday lending and a slow economy are a near-mirror image of the US, the Money Advice Trust, operators of the National Debtline, have seen a 268 percent rise in the number of calls about payday loans in the weeks approaching Christmas. This helpline claims to have received a call from a struggling borrower every nine minutes, according to the Mirror.

“In many cases, people are already in financial difficulties and they are using payday loans to pay basic bills and pay of other debts. With budgets stretched to breaking point and the extra pressure of Christmas approaching, payday loans can seem tempting—quick and easy to apply for, often with the bare minimum checks, and the promise of money in your account within minutes. But these loans don’t come cheap. They start with whopping annual percentage rates, typically of over 4,000 percent, and if you can’t pay off the loan in time you get hit with hefty extra charges,” said Gillian Guy, chief executive of Citizens Advice.

Consumers short on cash this holiday season must remember that while payday loans are certainly the easiest type of financing to get, they are not the only form available. Applying for a personal loan may be a far wiser move since this form of financing carries much more reasonable interest rates and repayment timelines. Even though another article has discussed that personal loans can—and maybe even should—be borrowed during the budget-tightening holiday season, it must be understood that payday loans are as different from personal loans as night and day.

In that borrowers obtain a personal or payday loan for their holiday purchases, they should remember that it must be repaid in a timely fashion. Borrowers should be realistic about what they can afford to spend this holiday season. Budgeting and being more frugal can help free up spending money for this special time of the year. At the end of the day, it is far better to have only purchased a few gifts and less food for a Christmas dinner than to find oneself unable to pay their rent or mortgage on a home.