Personal Loans for Vacation: Is Paradise Worth Financing?

Studies show that Americans are working longer hours to pay the bills and maintain some semblance of an enjoyable lifestyle. In households with two breadwinners, life is typically chaotic, making it difficult to enjoy extended periods of family time.

For many individuals and families, their only real respite is the two or three weeks of vacation afforded to them each year and every time they vow to make their next vacation even more memorable than the last.

Is It Okay to Splurge on Vacation?

Although, most families try to be budget-conscious when planning their vacations, it’s often the one thing they feel entitled to splurge on. It’s like the urge to indulge on a juicy hamburger after weeks of healthy eating; it can be rationalized as a one-time break from reality – a moment to get drunk on the freedom they so richly deserve.

However, that freedom comes at a cost.

In 2016, the average family spent $4,500 on their vacation. A dream vacation – the one that tops them all – can cost upwards of $10,000 depending on the destination. According to CreditCards.com, most Americans plan to pay for their vacations with their savings. Less than 25% plan to go into debt to pay for their getaway.

Those with incomes below $50,000 are most likely to borrow money to pay for their vacations; however, vacationers across the income spectrum say they would be willing to borrow money to take their “dream vacation.”

Is Financing a Vacation a Good Idea?

There is a general consensus among personal finance experts that financing anything that is consumable is not a good idea, mainly because you end up paying for something long after it has been consumed.

Vacations are considered to be a consumable item – you consume the time and enjoyment in a brief period of time. To have that experience again, you need to “consume” another vacation. The problem is, if you are still paying off your last vacation, how much enjoyment will the next one bring? How would you feel making payments two years after the memories have faded from that vacation splurge?

The general rule of thumb for spending money on a consumable or luxury item is, if you can’t pay for it with cash, you can’t afford it. Better to pay for it in advance with savings.

Many vacation purveyors, such as airlines, resorts, and cruise lines, offer getaway layaway plans, allowing you to book your vacation and pay for it in advance with monthly installments. The problem is most of these plans only cover the cost of the transportation and lodging, which are usually your biggest expenditures.

But the daily costs of dining, tourist activities, and shopping are still on you. When you include a few splurges along the way, you could easily spend another $1,000 to $2,000, which has to come from savings or be put on your credit card.

If your vacation can’t wait and you feel you need to borrow money to fund it, at least do your research. There are lots of financing opportunities for vacations available, but some could easily turn your dream vacation into a lingering nightmare.

Travel Provider Financing

Financing by travel companies has become rare these days. The cruise lines used to offer 0% financing through branded credit cards, but they required the balance be paid in full within 12 months. Disney still offers a 0% credit card to pay for its cruises or resort vacations, but it requires full payment within 6 months.

If you fail to pay the balance in full within 6 months, you’ll be charged retroactive interest on the original balance at double digit rates. If you are able to book a vacation 6 months out, you would be better off on a layaway plan or setting money aside in savings.

Some travel providers partner with lenders to offer financing, but you end up dealing directly with the lender. For instance, if you book a trip through United Vacations and select its monthly payment plan, you will be directed to UpLift, which offers a 12-month financing plan.

Personal Loans

If you want more flexibility and control over your vacation financing, you might be better off working directly with a lender to obtain a loan for vacation. A personal loan for vacation is unsecured – no collateral required – which means the lender relies solely on your creditworthiness and income for qualification.

Working with any of the top online lenders, such as Prosper, LendingClub, or SoFi, you can apply for a vacation loan to cover the entire cost of your vacation. Personal loan rates currently range from a low of 4.99% to as high 35.99% depending on your creditworthiness and the length of your vacation loan. Loan terms range between 12 months to 84 months.

The advantage of a personal loan for vacation is that the interest rate and the monthly payment are fixed so you can fit the payment to your budget based on the loan term. For example, if you borrow $5,000 at 9.99% over 2 years, your monthly payment will be $230. If that is outside your budget, you could select a 3-year term and lower the payment to $161.

Keep in mind that the longer your loan term is, the more you will pay in interest costs. It is also important to keep in mind that, in this example, not only will you be paying for a vacation for three years after you take it; its cost goes up by $807, which is the interest cost of the loan.