Vacation Loans: Is a Personal Loan a Good Idea?
A vacation loan can help you pay for a family trip for which you can’t afford to cover out of pocket. But before you go into debt for a vacation, it’s important to understand that you could end up paying more than you expect over the long run.
With Americans working harder to pay the bills, it seems only fair they find some enjoyment through vacations. It’s nice to be able to get out of town for a while. A good vacation can help you recharge and encourage the development of family-friendly memories.
However, taking a vacation can be costly. According to a study by Twine, the average person spends $564 on a weekend summer trip and $1,928 on a weeklong summer vacation. Paying for a trip can feel like a daunting task, especially when you consider that only 39 percent of Americans have $1,000 in savings.
So, how can you cover the funding gap when you want to go on vacation? Vacation loans are one option. Here’s what you need to know before you take out a personal loan for vacation.
On this page:
- Can a Personal Loan Be Used for Vacation?
- Benefits of Using a Vacation Loan
- Risks of Using a Vacation Loan
- Alternative Financing Options for a Vacation
Can a Personal Loan Be Used for Vacation?
When you get a personal loan, you can pretty much use it for whatever purpose you want. Personal loans can be used for emergencies, debt consolidation, home improvement, and even travel expenses.
Indeed, if you’re planning a trip, a vacation loan can help you smooth your cash flow in a way that makes the whole trip more affordable. With more companies offering online access to lending, it’s possible to apply for a loan, obtain loan approval, and have the money in your bank account within just a few days, or even faster in some cases.
For someone planning a long-overdue vacation, that can be very appealing and convenient.
Benefits of Using a Vacation Loan
One of the biggest benefits of getting a vacation loan is that you might have access to a low interest rate. If you have good credit, you are likely to qualify for a loan rate that is much lower than what you might pay with a credit card. If you know it will take you some time to pay off your trip, a personal loan could be the way to go.
You can also benefit from a degree of flexibility when it comes to loan amounts and payment plans. For example, if you borrow $5,000 at an annual percentage rate of 9.99%, you’ll end up with a monthly payment of $230 over two years. If that’s outside your budget, you could get a three-year term instead, reducing your monthly payment to $161.
A personal loan can help you manage your monthly cash flow while still being able to go on vacation. Plus, if you have the chance, many lenders won’t charge prepayment penalties, so you can pay off your loan faster and save money on interest.
Risks of Using a Vacation Loan
Of course, there are some downsides to using a personal loan to finance vacations. Even though you might get a lower interest rate with a personal loan than you would with a credit card, that doesn’t necessarily make it a good idea. Consumers with bad credit may not qualify for the best personal loan terms, either.
Your vacation will be done and over with after a week or two, but you’ll be paying for it for at least several months after you come home. If you finance your $5,000 vacation and your payment amount is $161 per month, as we discussed in the above example, you’ll repay a total amount of $5,796 over the course of three years.
That’s almost $800 extra paid in interest — enough to take an extra weekend trip.
Additionally, if you end up in a difficult financial position later and you miss a payment or two, your credit score will suffer the consequences. When your credit report is hit with late payments, you might not be able to access other opportunities down the road, including buying a home or qualifying for a car loan.
Before you decide to get a vacation loan, it’s important to carefully consider your situation and make sure the trip is worth the extra money you’ll pay in interest. You also need to make sure you can handle the risks that come with carrying that debt, including a possible detrimental impact on your credit history.
Alternative Financing Options for a Vacation
Rather than using a personal loan to pay for your trip, it can make sense to engage in a little advance planning.
According to Twine’s survey, 31 percent of respondents would work overtime to pay for their vacation. Another 30 percent would start a side hustle. Rather than financing vacations, a good chunk of Americans look for other ways to afford their trips.
Create a Savings Plan
Saving for a trip is another option you might consider over a vacation personal loan. It’s as simple as calculating the overall cost, figuring out how much you need to save each month, and depositing that amount into a dedicated savings account.
When following this strategy, you might need to put off taking the trip to allow yourself enough time to save. You might have to wait a little while, but at least you won’t be paying extra in interest.
Use Rewards Credit Cards
Another option is to take your planning to a new level and incorporate travel credit cards. Using an airline card for everyday purchases like gas and groceries can help you earn free airfare or hotel stays. Using a rewards credit card while on vacation can even help you earn additional cash back you can redeem for your next trip.
However, you have to be careful not to carry a balance on these cards. There’s probably a high interest rate, so if you don’t pay it off each month, you could end up paying even more in interest than if you got an unsecured personal loan.
Vacation loans can be a convenient and relatively low-cost way to pay for a trip. Personal loan interest rates are typically lower than what you get with a credit card, especially if you have good credit.
Before you decide to move forward, carefully consider if the trip is worth the extra money and risks that come with using a personal loan to pay for something as fleeting as a vacation. You might be better off planning ahead and saving over time instead.
As with any loan, be sure to compare loan offers before signing on the dotted line, and consult with both banks and credit unions to find the best personal loan.
Author: Miranda Marquit
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