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Personal Finance
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Should you use a personal loan to fund your summer vacation?

If you have good credit and room in your budget for another payment, a personal loan can be a cost-effective way to pay for a vacation

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A personal loan can be a good option for paying for a vacation, especially compared to credit cards.  (Shutterstock)

Vacations can be expensive, and with the rising costs of airfare and gasoline, they’re only getting costlier. But if you decide some rest and relaxation is worth the cost, you have options to help pay for it all. One common way is a personal loan, sometimes referred to as a vacation loan when you use it to fund your trip. 

Here’s how a vacation loan works, and whether taking out such a personal loan is a good idea.

If you’re considering a personal loan to fund your vacation, visit Credible to see your prequalified personal loan rates from various lenders, all in one place.

What are vacation loans?

A vacation loan is a type of unsecured personal loan. You borrow a lump sum of money up front and pay it back with a series of monthly installments over a set period of time, typically two to five years. 

Personal loans usually have a fixed interest rate, meaning your payment won’t change for as long as you have the loan. They’re also typically unsecured, so you don’t risk losing your home or other property if you fail to make your payments. However, missing payments can have a devastating effect on your credit score, making it harder to borrow in the future.

Many personal loan companies will include the term "vacation loan" in their marketing. These loans generally aren’t any different from a standard personal loan. You’ll just use the funds to pay for vacation expenses.

Are vacation loans a good idea?

Whether a vacation loan is a good idea depends on your unique financial situation.

Vacation loans have several advantages to other options you may be considering to pay for your trip. For example, personal loans generally have much lower interest rates than credit cards. If your vacation expenses will be more than you can comfortably pay off in one billing cycle, charging them on a credit card may end up costing you more in the long run than you’d pay with a personal loan. 

As an unsecured loan, a personal loan is also much less risky than paying for a vacation with a home equity loan or home equity line of credit. Both of those loans are secured by your property, meaning you could lose them to foreclosure if you’re unable to make your payments.

If you have good credit and enough room in your budget for another payment, a personal loan can be a good way to pay for a summer vacation. If you have poor credit or your finances are already stretched thin, you may consider another option to get away or spend some time improving your personal loan application.

But first, polish your finances

Before you apply for a personal loan, take stock of your credit and finances. Personal loan lenders set interest rates based primarily on an applicant’s credit score. People with higher scores will pay lower rates, while people with poor credit may face high interest rates and fewer loan options. 

Lenders may also look at the amount of debt you already have outstanding. If you have relatively little debt compared with your income, you may be offered better terms on your personal loan. A large amount of debt may make it more difficult to qualify for a personal loan. You should also factor in a future loan payment into your monthly budget, and make sure it fits comfortably before applying for a loan.

Credible makes it easy to compare personal loan rates from various lenders, and it won’t affect your credit score.

Pros and cons of vacation loans

Before you apply for a vacation loan, it’s important to consider the benefits and drawbacks:

Pros

  • You may find lower interest rates. Vacation loans have significantly lower interest rates than other ways you might choose to pay for your trip, like credit cards.
  • You can get money quickly. When you apply for a personal loan, you may get a decision within minutes and the money could be in your bank account as soon as the next business day.
  • You may be able to pay off the loan early. In most cases, you can pay extra toward your personal loan and pay it off early. Before doing so, double check your personal loan agreement to make sure the lender won’t charge a prepayment penalty. The best personal loans don’t have prepayment penalty fees.

Cons

  • You’ll have another monthly payment. A vacation loan is a form of debt much like a car loan or student loan. You’ll have a set payment that you must make every month, so be sure you can afford it before taking out a loan.
  • Rates depend on your credit score. The interest rate you receive will depend heavily on your credit score, and the range offered can be wide. If you have poor credit, you may have a high interest rate — that means you’ll pay thousands of dollars more for your vacation than you would otherwise.
  • Failure to pay can hurt your credit. If you default on your personal loan, the lender can report it to the credit bureaus. This can severely damage your credit score and make it harder to borrow money again in the future.

How to pay for a vacation without taking out a loan

Ideally, you wouldn’t need to take out a loan to pay for your vacation. Paying cash is always the thriftiest way to meet a large expense. You may even have a more relaxing time on your vacation knowing you won’t be paying for it over the next few years. Here are a few tips to help you pay for a vacation without taking out a loan:

1. Set a budget. It can be challenging to meet a financial goal like saving for a vacation without knowing exactly where your money is currently going. Take stock of your income as well as your regular expenses, like your rent or mortgage, utilities, and other debt payments. Also track the amounts you typically spend on groceries, entertainment, and other expenses. This will show you how much money you can save each month and give you ideas on where you can cut back spending, if needed.

2. Examine your emergency fund. A general rule of thumb is that you want to have three to six months’ worth of your regular expenses set aside for emergencies. Your budget will help you determine how much you’ll need. This emergency fund can help you meet unexpected costs, like a car repair or medical bill. Before you start saving for a vacation, make sure your emergency fund is in good shape.

3. Open a dedicated bank account. It may be easier to keep track of how close you are to your savings goal if you open up a new savings account or create a sub-account in your existing savings account to keep your vacation savings. You can set aside a certain amount of money each month to put into your vacation account, or you can put unexpected earnings in there to help you meet your goal.

4. Shop around for good deals. If you can be flexible on your travel arrangements, you may be able to find cheaper flights or hotel stays that are easier on your budget. Use a site like Kayak or Expedia to help you find cheaper airfare, or sign up for a service like Scott’s Cheap Flights to help you find particularly good deals.