Are Vacation Loans a Good Idea?
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Unless you’re adept at finding great hotel deals or can pack up on a whim when you see an amazing flight price, travel is expensive. Americans spend an average of $583 on domestic trips, and $3,273 when traveling internationally. The price tag on honeymoons is even higher, with an average of $4,000.
Ideally, you’ll pay for travel expenses out of a savings account specifically created for that purpose. But sometimes things come up and you need — or want — to travel faster than those savings can accumulate. When that happens, you might consider taking out a vacation loan, also known as a personal loan, to fund the trip.
What is a vacation loan?
If you must travel before you’re able to save enough for the trip, a vacation loan could be a useful option. Also known as a personal loan, vacation loans often come with lower interest rates than what a credit card offers. If you plan to borrow to cover your costs, a personal loan may be the more affordable choice.
You can apply for a personal loan through a bank, credit union or online lender. With a traditional personal loan, you won’t be required to use collateral to qualify. However, the lender will run a credit check as part of the approval process, so you’ll need decent credit to use this as an option.
The amount and terms of a personal loan vary by borrower and lender. Typically, personal loans can be as much as $50,000, but you don’t need to request the maximum amount. Interest rates depend on your credit score and what the lender offers, though they generally fall between 6 and 40 percent.
Once you’re approved and receive the money, you can use the funds however you choose — including to take that dream vacation. However, it’s worth considering the pros and cons before you book that massage with an ocean view. Taking on debt is a serious responsibility, and the decision shouldn’t be made lightly.
The pros of using a personal loan for a vacation
Pro #1: There’s no delayed gratification.
Going on vacation isn’t just about skipping work for a week or taking a much-needed social media detox. Many people see vacations as a chance to live in the moment and take advantage of their ability to travel and make memories right now. Using a personal loan to cover the costs allows you to jump on great flight or hotel deals while spreading out the costs of a trip over time.
Pro #2: You don’t need collateral.
If you have decent credit and can qualify for an unsecured personal loan, you can borrow money without using assets such as your house, car or other valuables to secure the contract. As long as you’re confident you can make the monthly payments without overstretching your budget, a personal loan can provide the cash needed to travel comfortably.
Pro #3: Personal loans can be less expensive than other borrowing options.
If you have good credit, personal loans might be a cheaper option than charging that last-minute trip to your credit card. According to the Federal Reserve, the average interest rate for credit cards in May of 2018 was about 15%. For 2-year personal loans, the average rate clocked in at just 10%.
Of course, personal loans may come with other expenses, such as an origination fee. Always review the terms of the loan and see how much it will cost you in total interest and fees before signing on the dotted line.
Pro #4: You can finance milestone moments.
Milestones such as getting married or celebrating a big anniversary aren’t just sentimental occasions — they’re also pretty costly. If you’ve tapped your wedding savings on the big day but are still determined to take a honeymoon right after you say “I do,” a personal loan can help you get there. Same goes for other major moments, such as a 10- or 20-year anniversary.
Those landmarks don’t come around often, so you may decide taking on the debt is worth it for the sake of the celebratory memories.
Pro #5: You can be there for loved ones’ important events even when you’re strapped for cash.
Sometimes life catches you by surprise. Your best friend gets engaged and insists that you be by their side at the wedding (and the engagement party, the bridal shower and the bachelorette party). Or, on the more somber end of the spectrum, a relative falls gravely ill or passes away.
If you don’t have savings you can use for flights and travel expenses, you may want to get a personal loan to ensure you can be by your loved ones’ sides at the most important moments.
The cons of using a personal loan for travel
Despite the reasons listed above, taking out a personal loan to fund a vacation isn’t always a wise decision. In fact, many financial advisers caution against it except in very limited circumstances.
Con #1: You’re taking on debt.
When it comes to discretionary expenses, saving is always better than taking on debt, even when you expect to be able to pay it down quickly. Artie Green, CFP and founder of Cognizant Wealth Advisors, said people may feel comfortable taking out a loan if they’re expecting to receive a large sum of money in the near future.
However, if that money never materializes, you’re still responsible for paying on the loan. Even expected windfalls such as bonuses aren’t always guaranteed, so you’re taking a risk by signing on for a big loan without a guarantee of relief.
Con #2: You’re paying interest.
Lenders consider unsecured personal loans higher risk because they aren’t backed by collateral. Because of this, they usually charge higher interest rates than other types of debt. A good credit score may help you get a better rate, but you’re still paying more than you would if you saved and paid for the trip in cash. With interest, “you could end up paying twice as much for that trip two years down the road,” said Michael Kelley, an Ohio-based CFP.
Con #3: You risk not being able to repay the loan on time.
“If anybody is choosing to borrow money, they should always have a plan as to how they expect to pay that money back before they do the borrowing,” Green said. Don’t get so caught up in the excitement of a prospective trip that you fail to think through the consequences of taking out a loan.
Maybe you’re covering your monthly expenses right now, but just barely. You could find yourself overwhelmed by the debt and at risk of default if you don’t have a strategy for paying it off in a timely manner.
Con #4: You jeopardize your long-term borrowing ability.
Having a loan — especially one you struggle to repay — constricts your financial abilities in the future. Kelley offered the example of a couple who uses a personal loan to pay for their wedding and honeymoon. If they start their marriage in debt, they may be less likely to qualify for a mortgage or financing for other important priorities if they’ve already taken on too many financial commitments.
Kelley and his wife married in 2017 and he said they saved for their honeymoon rather than taking on debt, putting away $1,500 a month toward the trip. “When we finally got on the plane, it was all paid for, there was nothing we had to worry about. And the weight off your shoulders is amazing,” he said.
How to save for your vacation
Rather than reacting to sudden travel needs and opportunities by taking on debt, you’re better off starting a savings fund now. Consider following these steps:
- Figure out your travel dates: If you know your travel date or anticipate you’ll be traveling for an upcoming wedding or other event, you can set a monthly savings goal. Simply estimate the amount you’ll need for the trip and divide it by the number of months or years until you plan to go. Then you’ll know how much to save each month.
- Open a savings account: A dedicated account for your vacation fund can help ensure you don’t spend the money you’ll need. If you already have a savings account, some banks will allow you create the equivalent of “coffee cans” within your savings account, Kelley said. Instead of physically dropping dollars into a savings jar, you can funnel amounts into dedicated funds via your bank’s website or app.
- Consider a credit card rewards program: Stowing away cash in a savings account isn’t your only option for affording a vacation. You can also use credit card rewards programs to strategically to plan for vacations, but only if you’re disciplined and pay the card’s balance off each month. Opening a card that allows you to earn airline miles or points toward hotel stays can help you reduce travel costs through your everyday spending, but it’s not worth racking up high credit card balances just to earn points. Find a good rewards card, use it moderately and pay it off every month to avoid high-interest debt.
Debt can be unpredictable, even when you think you’ve planned for everything. Barring circumstances in which you must take out a personal loan to travel, your best bet is to start saving, even in small amounts, today.