Planning a vacation is fun until you get to the big question: how are you going to pay for it all? From transportation to lodging expenses, even the most budget-conscious traveler can end up spending a lot of money on just one trip. Instead of waiting to save up enough cash for your trip, you may consider financing it with a vacation loan. This strategy can help stretch out the cost over a longer period of time but does come with some downsides as well.
Find out more about vacation loans to determine if this choice the best fit for your next trip. We’ll also share a few alternatives so you can compare common ways to pay for your vacation.
What is a Vacation Loan?
A vacation loan is a personal loan that is repaid in installments over a set period of time. Lenders usually offer personal loans that can be used for a variety of purposes and you don’t always need to disclose what you’ll use the funds for. Others may specifically package a personal loan as a vacation loan, but they operate in the same way.
No matter what they’re called by your lender, vacation loans are very straightforward. You submit an application to your chosen lender and, if approved, you’ll receive an offer of loan terms outlining the interest rate and how long you have to repay the loan. You’ll also see what your monthly payment looks like.
If you’re happy with the offer, you’ll sign the loan agreement (usually electronically) and the lender will then send the funds directly to your bank account. The amount of time it takes to receive the money depends on both the lender and your bank.
Once the funds have arrived, you can use the money to book your travel arrangements as well as for your day to day expenses when you arrive at your destination. You’re in control of your own budget for your vacation.
Vacation Loan Advantages
Vacation loans come with both pros and cons. One of the major advantages is that if you’re weighing the option of taking out a loan compared to using your credit card to pay for the trip, you may save money with the vacation loan. Personal loans typically come with lower interest rates compared to credit cards.
The APR is also a fixed rate with a loan, whereas your card rate could vary and cause you to accumulate even more interest on your balance. And since a credit card is a type of revolving credit, you may be tempted to simply pay the minimum balance each month without a clear plan of how to pay off the debt completely.
With a vacation loan, on the other hand, you pay the same amount each month and know exactly how long it will take you to pay off the entire loan.
Another benefit of a vacation loan is that it’s an unsecured loan. That means you don’t have to use any of your personal property or savings as collateral for the loan. In the event you do default on the loan, you’ll face financial and credit consequences, but major investments like your car or your house won’t be at risk.
Finally, personal loans typically give you access to fast funding. Online lenders can often get your funds delivered to your bank account within a couple of business days — sometimes even faster. Whether you’re planning a large trip for next year or want a last-minute getaway, you’re likely to get the money you need very quickly.
Vacation Loan Disadvantages
One of the biggest disadvantages of taking out a vacation loan is that you’re going into debt over something that’s not a necessity. It’s important to consider that if you can’t pay cash for a vacation, could you pay cash for a financial emergency?
Before you apply for a vacation loan, think about the health of your overall finances and how you would be able to handle an emergency. If you can’t answer that question in a way that makes you feel comfortable, it might be time to rethink financing your trip.
Another downside of taking out a vacation loan is that it potentially limits your ability to get financing when you need or want it for other things, like an auto loan or mortgage. Lenders look at your debt-to-income ratio as part of any loan application. If you have too much debt in other areas, you may not qualify to borrow as much as you’d like for a car or a house.
Another consideration to make with a vacation loan is that your loan term will likely last a couple of years. You might regret having to still pay for a vacation years after it’s happened and you’re ready for a new trip.
Finally, always check to see if your lender charges an early payoff penalty for a vacation loan. Even if you anticipate only taking a short period to repay the loan, you may be charged an extra fee for doing so. Prepayment penalties usually amount to a predetermined percentage of your loan balance. Look out for that language in your loan agreement before you commit.
Vacation Loan Alternatives
As you think about whether or not a vacation loan is the best way to finance your travel plans, consider these three potential alternatives. Each one offers both pros and cons to think about.
Cash Savings
Perhaps the best way to pay for a trip is using cash savings. It’s low risk because you don’t have to worry about ongoing payments after you return. Plus, it doesn’t cost you anything in terms of interest and fees.
There are plenty of ways to quickly save up for your vacation, especially if you can wait a couple of months. Simple strategies like reducing your weekly grocery budget or doing a spending freeze for a week each month can pad your bank account several hundred dollars over a short period of time. Take a hiatus from some of your monthly subscription services or pick up a temporary side hustle until you’ve saved up enough for your vacation.
When you have a specific timeline and dollar amount in mind, it’s much easier to successfully reach your savings goal. Make a plan and then think of realistic ways you can achieve it. You may be surprised at what you can actually accomplish.
Credit Card
Using a credit card instead of a vacation loan does come with a higher interest rate, but there are a couple of strategies you can employ to make it work better for you. First, look at credit cards that come with travel rewards.
Many companies offer a signup bonus with a huge amount of points when you spend a certain amount of money with the card during the first couple of months. If you can responsibly manage those payments, you could easily pay for a flight or hotel with those bonus points.
Another cost-effective way to use credit cards is to charge your trip, then transfer the balance to a card with a low or 0% balance transfer promotion. It’s important to read the fine print with those offers, however, because it’s easy to accrue fees or get charged a higher interest rate if you miss a payment. You also may get charged a much higher rate if you still have a balance after the promotional period ends.
But if you can reasonably expect to pay off your vacation balance within that period, you can save a lot on interest. Plus, you don’t even need to charge the entire trip. Pay what you can with cash, then pick and choose one or two major expenses for your credit card. That can make the repayment process much more manageable.
HELOC
A HELOC is a home equity line of credit that lets you tap into your home’s equity as collateral for having a credit line at your disposal. The biggest downside is that your home is the collateral used for the line of credit. You have to be honest with yourself if this risk is worth the vacation.
The advantage is that HELOCs typically come with extremely low-interest rates. You can also borrow just what you need since you draw on the line of credit rather than receiving a huge lump sum. Again, if you only need to finance a portion of your trip, this could be a low-cost option to do so, especially if you already have a HELOC open.
The Bottom Line
A great vacation can recharge your batteries while experiencing a completely new place than what you’re used to. Whether you prefer sandy beaches or an exotic trip abroad, choosing how to pay for your vacation is just as important as picking a place to go. A vacation loan makes payments predictable and manageable, but can also take more time to pay off than you’d like.
Weigh all of your options for making a decision and also remember that you can mix and match what you pay for in cash and what you finance. Craft a solution that works for you so you can enjoy your vacation with total peace of mind.
