Vacation Loans: What You Need To Know
Hanna Kielar7-Minute Read
It’s easy to daydream about taking a luxurious family vacation or a romantic getaway but paying for it is another story. The cost of transportation, accommodations, food and other travel-related expenses can quickly add up, which leads vacationers to consider alternative payment methods.
For some people, taking out a vacation loan is an option for covering the cost of a once-in-a-lifetime trip. However, you should weigh the personal value of that trip against the potential negative impacts of a vacation loan. In this article, we’ll review the benefits and drawbacks of vacation loans to help you make a conscious choice before your next trip.
What Is A Vacation Loan?
A vacation loan, also known as a travel loan, is typically an unsecured loan that can be used to finance any kind of travel expenses. While some loan lenders offer vacation loan options, they’re usually referring to using a personal loan to pay for hotels, rental cars or other vacation costs.
Since most vacation loans are unsecured, you won’t have to put down collateral to secure the loan. Similar to other types of personal loans, the borrower will be required to repay the loan in fixed monthly installments.
How Do Vacation Loans Work?
Vacation loans work similarly to how personal loans work. This type of credit is considered an installment loan, meaning that a bank, credit union or online lender will lend you a lump sum of money that will be repaid within a predetermined amount of time.
Once you’ve been approved for a vacation loan, you’ll receive your loan terms, which include details about your term length, fees and interest rate. Interest rates for personal loans range between 6% and 36%, which are determined based on your creditworthiness, income level and other financial factors.
The Pros And Cons Of Using A Personal Loan For Vacation
Now that we’ve established how vacation loans work, let’s examine the pros and cons of using a personal loan to finance a vacation.
The Pros Of Using A Personal Loan For Vacation
- Set loan terms: Since personal loans have predetermined term lengths and set monthly payments, you’ll be able to plan your budget accordingly. With a vacation loan, you can plan how and when your debt will be repaid, without the risk of the payback amount increasing.
- Lump sum payment: Once you’re approved for a vacation loan, you’ll receive the total amount in one payment. This makes it easier to not overspend when planning for your vacation and budget for the impending monthly payments.
- Competitive interest rates: In some cases, the interest rates on personal loans are lower than credit card interest rates. However, these competitive interest rates are only available to well-qualified borrowers.
The Cons Of Using A Personal Loan For Vacation
- Unnecessary debt: Financing a vacation with a personal loan adds another monthly payment to your personal budget, which means you’ll be paying off this trip for months or years after returning home. If you’re struggling to afford the trip of your dreams, consider the long-term financial stress of shouldering a vacation loan.
- Additional fees: Most loan lenders charge borrowers fees on personal loans, such as origination fees and prepayment penalties. These expenses are in addition to your monthly payment and interest charges.
- Interest increases the total cost: Since vacation loan holders have to repay the loan amount plus interest, the total amount paid will exceed the cost of the vacation. That means you could pay hundreds, if not thousands, of dollars in interest over the life of the loan.
What Are Other Vacation Financing Options?
If a vacation loan isn’t right for you, don’t worry – there are plenty of other options for financing a future vacation. Let’s look at some alternative ways to fund your travel plans.
Pay In Cash
The easiest way to pay for a vacation is from your own pocket. Paying with cash savings eliminates the need for additional loans, interest or fees. However, this tactic may require you to increase your savings prior to booking your trip.
Once you’ve determined the cost of your future trip, start saving by putting money into a designated travel savings account. In the weeks leading up to your trip, consider these last-minute saving ideas to give yourself extra spending funds.
Open An Interest-Free Credit Card
One of the major drawbacks of taking out a vacation loan is the large amount of interest that accrues over the life of the loan. Luckily, there are plenty of 0% APR credit cards that allow borrowers to open a line of credit with a no-interest introductory period.
A perk of this payment method is that you can carry a balance interest-free throughout the introductory period, which usually ranges from 6 months to 2 years. But once the introductory period ends, be prepared to pay interest on the remaining balance.
Pro tip: Pay off the entirety of the vacation cost during the introductory period to avoid any interest charges.
Apply For A Travel Rewards Credit Card
Another way to finance your next vacation is through a travel rewards credit card. This type of credit card is especially beneficial to users who travel frequently, because you can earn rewards points and then use them to reduce the overall cost of a vacation.
Some travel rewards credit cards also offer perks such as a sign-on bonus that can help offset the total cost of a large vacation purchase. Before applying for this payment option, keep in mind that most travel rewards credit cards have high annual fees and credit score requirements.
How To Get A Vacation Loan
If you’re interested in taking out a vacation loan, be sure to complete the following steps before submitting your loan application.
- Shop around for a lender. Just like any other type of loan, it’s important to request quotes from multiple lenders to find the best rates and terms. Don’t forget to research the qualification requirements from each lender.
- Check your credit report. To ensure that your credit score is updated and accurate, you should check it through your credit card provider or an online credit service. If you detect an error on your credit report, be sure to get it fixed before applying for a vacation loan.
- Prequalify for a personal loan. Before submitting your official application, you’ll need to prequalify with multiple lenders to see their final loan offers. Luckily, this step only requires a soft credit check and will not affect your credit score.
- Submit a loan application. To submit your application for a vacation loan, you’ll have to provide several pieces of financial information. This typically includes bank account information, recent pay stubs, tax forms and personal identification details. If you’re approved for the loan, you’ll have access to your funds within a few business days.
Vacation loans allow borrowers to take their desired trip while paying back the debt over time. Be sure to consider whether you can afford the monthly payments and interest charges before moving forward with your decision. If you’re prepared to handle the long-term financial implications of a travel loan, it can allow you to take a relaxing vacation or explore a bucket-list location.
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