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Should You Take Out a Loan to Go on Vacation?

Christy Bieber, The Motley Fool

We all need a vacation from time to time, but is borrowing money to take a trip a smart decision?
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Taking a vacation: It’s on everyone’s to-do-list, and it actually has proven health benefits, including reducing stress and helping to lower the risk of heart disease. Unfortunately, going on vacation can be expensive, so you may not be able to afford to take a trip without borrowing.

If you’re considering using borrowed funds to go away somewhere fun, it’s important to think carefully about whether it is actually a good idea to take out a loan to go on vacation or not.  

Is it a good idea to take out a loan to go on vacation?

While it’s tempting to borrow the funds you need to take an amazing trip, the reality is that it’s almost always a bad idea to take a loan to go on vacation.

A vacation is a luxury, not a necessity -- and it’s not something that’s going to help you grow your net worth over the long term. Paying interest on debt to go on vacation simply doesn’t make sense under these conditions.

If you borrow for your trip, you could be paying for your vacation for months or even years. And you could make your vacation hundreds or even thousands of dollars more costly due to the interest you’ll pay on the loan you took out for your trip.

When you take out a personal loan, you take on a monthly obligation to repay the principal you borrowed, along with the interest on the loan. All of this money that you have to send to your lender month after month will force you to stretch your budget.

You’ll have less cash to put towards other goals, whether those goals are saving for retirement, saving money in an emergency fund, or saving up for your next trip. With less spare cash, the chances are good you’ll end up having to borrow for other things too.

There are very rare cases where it might be justifiable to borrow to go on a trip -- such as a very important family wedding that can only happen once and that your family from all across the globe is going to. But for the most part, the risk to your future financial security and financial goals is definitely not worth it, so you should just say no to borrowing money for a vacation.

Loans can be better than credit cards if you’re definitely going to borrow

While borrowing to go on a vacation isn’t typically a good idea, there are times when you’re going to decide to go on a trip you can’t afford despite the financial downsides.

In these situations, you should look for the most affordable way to borrow. In many cases, a personal loan will be a better choice than using a credit card.

That’s because personal loan interest rates are usually lower than the rates on credit cards. The exception is when you can qualify for a 0% promotional interest rate card for a period of time. If you can pay off the card before the 0% rate expires, then using credit would cost less than a personal loan since you wouldn’t pay any interest on the money borrowed.

Personal loans typically also beat out credit cards for funding a trip because they have a fixed repayment schedule and a definite payoff date. You’ll know up front before borrowing exactly when your loan will be paid off and how much the total loan will cost you. You’ll be able to make a more informed choice as to whether borrowing is worth it, as opposed to just sticking the trip on a credit card and potentially taking many years to pay it off if you make only minimum payments.

If you must borrow and you decide a personal loan is the right way to do it, you should borrow the minimum possible and choose the shortest repayment term you can afford. The less you borrow, the lower the loan interest rate, and the less time you pay interest, the more affordable it will be to take out a loan for your trip.

There are alternatives to taking out a loan for vacation costs

Rather than borrowing for a vacation, there are better ways to try to pay for your trip. To ensure you can afford a vacation without having to take out a loan, try these techniques:

  • Start a vacation saving fund. If you save a small amount each month to cover vacation costs, you should have the money that you need when the time comes to get away.
  • Take advantage of credit cards that allow you to earn miles or free hotel stays. When you use a travel rewards card for everyday spending, you can make your vacation cheaper with each purchase. Ideally you’ll be able to earn enough rewards that at least part of your vacation costs are covered in full so paying for the rest of your trip will be much more affordable.
  • Look for inexpensive vacation destinations. Booking at the last minute to take advantage of special deals, traveling during the off-season, or staying closer to home can help to make your vacation much more affordable.

With a little advance planning and a bit of creativity, hopefully you can find a way to travel and enjoy some time off without breaking your budget or borrowing and getting stuck paying interest costs.

Make a fully-informed choice about borrowing for your vacation

Although borrowing for a vacation should be avoided whenever possible, using a loan can make sense if you’ve decided you’re definitely going to go away on a trip you can’t afford to pay for otherwise. Of course, if you can find a way to save up and pay for your trip without incurring interest costs, this is always a better approach -- so start your vacation fund today and be ready when your next big vacation opportunity comes up.

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