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Should I use a personal loan to go on vacation?

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Taking some much-needed PTO and traveling to a new place can be exciting, but it’s also expensive.

When you add up the cost of airfare, fuel, a rental car, hotel stays, excursions, travel insurance, going on vacation can certainly take a toll on your budget. This is especially true if you’re covering the cost for your entire family.

However, with a little creativity, it is possible to afford your dream vacation and make it easier on your wallet.

How much it costs to go on vacation

According to travel site Hopper’s most recent consumer travel index, jet-setting to a new destination will cost travelers. Of course, it’s important to note that these are just estimates. Travel expenses can vary drastically depending on your destination and if you’re traveling during a peak season.

For travelers who prefer to take a road trip, the cost of fuel alone can add up quickly. As it stands, the average price per gallon for regular gas is $3.20. Depending on your vehicle’s fuel efficiency and destination, you could be shelling out quite a bit at the gas pump.

Ultimately, there are so many different ways you can cover the cost of your vacation. For some, saving up in advance in a high-yield savings account or certificate of deposit (CD) and paying for a vacation outright is the best way to go.

However, financing may be the best option for your financial situation and can often make the cost more manageable.

Vacation loans

A vacation loan is like the typical personal loan from a bank or credit union. Personal loans are usually unsecured, meaning that you aren’t required to back up your loan with a physical asset like you would an auto loan or mortgage, two common types of secured loans. You can use a personal loan to cover a wider range of costs — like a vacation. Personal loans also offer a fixed interest rate, which is usually a lower rate than most major credit cards.

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It’s important to note that personal loan approval is based on factors such as your debt-to-income ratio and credit history. If you have bad credit or if your credit isn’t on the higher end of the scoring range, you may not qualify for the lowest rate or most favorable repayment term. To qualify for the best personal loan rates and loan terms, you’ll want your score to fall within the "good" to "excellent credit" range. A score above 670 is generally considered good.

You should also keep in mind that your circumstances can change during the life of your loan repayment, which could make it challenging to meet your loan payments each month and negatively impact your credit score if you make a late payment or default on your loan.

The pros and cons of vacation financing

If you’re considering a vacation loan for your next trip, you should be sure to carefully weigh the following pros and cons.

Pros:

  • Vacation loans can offer a more flexible payment solution: Rather than taking a lump sum of cash out of your savings, breaking up that purchase into smaller installments can lessen the financial burden.

  • Certain financing options can offer fast funding: Speedy loan funding can be especially helpful if you’re looking at booking travel in the near future. Many financing solutions grant you access to your travel funds within a matter of business days. Certain online lenders may even offer same-day funding or next-business-day funding.

  • You may have a larger vacation budget to work with: Getting a loan to pay for your vacation or putting it on a credit card could give you extra funds to work with and expand your travel budget, broadening your options for travel dates, airlines, accommodations, and more.

Cons:

  • Loans and credit cards come with the added cost of interest and fees: Borrowing money isn’t free – your lender will charge you interest and potentially additional processing or prepayment fees.

  • Adding to your debt balance could make it more difficult to wipe out existing balances: If you already have existing loans like a car payment, student loan, or mortgage, taking on a new loan for travel could make it harder to pay down those balances.

  • You might find it harder to qualify for new debt should you need to: You never know when you’ll need to apply for a new loan. If you don’t have an emergency fund, you could find yourself in a position where you might need quick financing. Too many loan applications in a short time can sometimes be a red flag for lenders. Borrowing now to cover a vacation could make it harder to get a loan in a pinch if you need one. Ultimately, you want to enjoy your vacation and wouldn’t want your travel plans to make it harder to finance bigger milestones in the future.

What to consider before financing your vacation

Before you borrow money to fund your travel plans, think carefully about how that new debt will affect your personal finances as they stand and whether there are better alternatives you can consider.

  • What would your overall borrowing costs be? This means the loan amount plus any added interest and fees. When comparing different lenders, ask about any potential origination fees, late fees, or prepayment penalties that may apply.

  • How will a new payment factor into your budget and current debt situation? Based on your loan offers, how would a new debt payment fit into your monthly budget? If you’re unsure whether you can comfortably afford to pay off this new debt, you might want to take some time to comb through your budget and see if there are other areas where you can cut back on your spending. And ultimately, you should be honest about how feasible it is to take on this new monthly payment. If this debt will impact your ability to cover your non-negotiable expenses, save money, and repay existing debt, you might want to put your travel plans on hold.

  • Will your travel loan account for unexpected travel costs? Unexpected expenses have a way of creeping in, even on vacation. Crunch the numbers to determine if you can afford to borrow money for your upfront expenses, as well as any expenses that happen on the go.

If, after very careful consideration, you decide not to apply for a personal loan, there are other ways to help cover the costs.

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How to pay for a vacation without a personal loan

Personal loans are just one of many options to fund a trip. Alternatively, you can take an inventory of what you currently do have, as well as an honest look at your credit, and choose a completely different route.

Cash

If you have the cash on hand for even a portion of your travel cost, this is the most cost-effective option. You won’t pay extra fees unless you’re withdrawing money from an ATM, and you won’t be put on a strict timeline to replenish that money.

The downside of using cash on a vacation is that your money isn’t protected in the same way a credit card payment is. If you use cash to pay for an excursion, for example, disputing that charge could be more difficult if something goes wrong.

Credit cards

Credit cards can certainly offer some major benefits when it comes to travel plans, especially if you have a card that rewards spending on travel.

Travel credit cards are a type of rewards credit card that rewards your spending in the form of points or miles that can later be redeemed for travel-related expenses like rental cars, hotel stays, airfare, and more.

If you have a travel rewards credit card, you could pay to pay for your vacation with a credit card. However, credit cards tend to carry higher APRs than other forms of debt. The most recent data from the Federal Reserve shows that the average credit card APR is about 21.19%.

If you’re strategic about how you use your card, you can avoid some of the bigger costs that come with a credit card like making sure to pay off your balance before your next billing cycle to avoid interest charges and taking advantage of intro offers and bonuses to cover some of your vacation costs.

Rewards

Another way to lessen the financial burden of your travel plans is to use any rewards you’ve earned from using your credit card or loyalty points from your favorite travel brands. Many travel cards reward you for your spending on travel through points, cash back, or miles. Once you’ve earned enough rewards, you can redeem those for airfare, hotel stays, rental cars, and more.

The catch: If you book through your credit card’s travel portal, it could be more difficult to change or cancel your travel plans once they’re booked. You run the risk of not getting your rewards back once they’ve been redeemed, depending on your credit card provider.

Buy now, pay later services

Buy now, pay later (BNPL) platforms like Affirm, Afterpay, and Klarna have grown in popularity and are commonly offered among major merchants and retailers. The major benefit of using a buy now, pay later platform is that you can finance your travel plans immediately after your application is approved — which usually consists of a short online form. Within minutes, you could be approved and ready to pack your bags.

These types of services do, however, come with strings — usually in the form of sky-high interest rates and excessive fees. BNPL platforms may also force consumers into an auto-pay schedule to ensure they are paid. BNPL providers can offer the quick and easy approval you’re looking for, but it may not be the most cost-effective option. What’s more, not all platforms report payment history to the credit bureaus which means your credit score may not see a boost from on-time payments.

There’s no one right way to pay for a trip

Personal finance is just that: personal. So many factors are involved behind every financial decision — especially when it comes to our paid time off. Vacation loan or not, just make sure you’re comfortable with however you choose to fund your fun.