Inflation Is 2.3%, But Stuff Is Still Expensive. Is a Loan the Move This Holiday Season?

The pace of inflation has slowed over the past two years or so with the latest inflation rate showing prices having increased just 2.3% in October since last year. That’s according to the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation. It’s up slightly from September’s rate of 2.1%. Earlier this month, Consumer Price Index (CPI) data from October showed a 2.6% annual increase in prices of consumer goods and services. Both inflation rates are close to the Federal Reserve’s target of 2%.

If you’re shopping for gifts this holiday weekend and find prices are still more expensive than you can afford, you may be tempted to take out a loan, use a buy-now-pay-later company, or even open a new credit card. While each has its perks, it’s important to understand the costs and risks associated with each.

Popular Gifts Are Getting Pricey

The popular board game Ticket to Ride had a suggested retail price of $39.95 when it was first released 20 years ago. Now, its list price is $54.99, though you can often find discounted offers.  

Or if you’re looking for a big-ticket holiday gift, the recently released PlayStation 5 Pro costs $699.99. Comparing prices for electronics gets tricky as tech changes can impact prices. But consider this: the PlayStation 5 Pro costs $200 more than the PlayStation 5, which launched in 2020, according to a report by video game site GameRant. By comparison, the jump from the PlayStation 4 of 2013 to the PlayStation 4 Pro when it came out in 2016 was only $50.

While it’s hard to draw straight lines between past and present prices—such as with holiday deals causing price changes—on the whole, you can expect to spend more on holiday gifts this year than in years past, especially if you’re trying to keep up with what others in your circle are spending.

The average U.S. consumer is expected to spend a record-high $902 over the winter holidays on seasonal items such as gifts, food, and decorations, according to the National Retail Federation.

But what if you don’t have that amount of disposable income? Should you borrow money to get through the winter?

Is a Loan a Good Idea to Pay for Gifts This Season?

Taking out a loan to pay for holiday gifts may seem tempting, especially if you’re planning a New Year’s resolution, like cutting back on spending to quickly repay the loan. However, a loan can be expensive and risky.

“It’s natural to want to have a joyful season, buy gifts for family, and make the most of it,” said Joe DiSanto, founder and CEO at Play Louder. “However, the reality is that taking on debt—whether through a personal loan, credit cards, or buy-now-pay-later options—to fund holiday spending is generally not advisable. If you’re in a position where debt is necessary to cover holiday expenses, it may point to a larger financial issue.”

If you don’t have the money to pay for gifts now and you take out a loan, you could incur significant interest charges if you can’t pay it off quickly. For example, the average personal loan interest rate in October was 26.11%, according to interest rate data analyzed by Investopedia. If you took out a $1,000, 12-month personal loan at that rate, you’d pay an extra $147 in interest if making regular monthly payments.

Credit cards aren’t much better, with the median annual percentage rate at 24.62% in October, according to Investopedia’s credit card database. Even if you put gifts on a credit card with a low or 0% introductory rate, there’s still a risk that you won’t have the cash flow to make repayments before the interest rate increases.

Buy now, pay later (BNPL) is another option, which typically splits purchases into smaller monthly payments without charging interest if payments are made on time. Indeed, 48% of young adults are thinking of using BNPL more to purchase holiday gifts this year, according to a survey by finance app Cleo.

There can be late fees and credit score damage if you miss BNPL payments, so you want to be careful with this option. If you lose your job in the new year, for example, you might struggle to keep up with BNPL payments.

Overall, paying for holiday gifts with any sort of financing may be tempting, but it’s often better to stick with what you can afford now.

“There may be certain cases where it’s reasonable, such as if you recently lost your job but have a new position lined up in the new year,” DiSanto said. “In that scenario, knowing you can pay off the debt within three to six months could make financing a little more justifiable to avoid missing out on the holiday experience. But if it’s a recurring situation, where your income isn’t enough to comfortably cover holiday costs, it’s unlikely your income will suddenly increase enough in the following months to cover these expenses. Financing holiday gifts is not a sustainable solution in that case.”