Should you take out a loan for your vacation?

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In a Nutshell

If you’re yearning for a getaway but can’t quite afford your dream trip, you may be tempted to turn to a personal loan for your vacation, or other means of financing. It’s always better to budget and wait until you have enough in savings to pay for your vacation. But if that isn’t an option, it’s important to ensure you can afford to repay a vacation loan before you take on the debt.
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Everyone needs a vacation once in a while, but it can be difficult to save up for one.

“While a vacation loan can help finance that once-in-a-lifetime trip to Europe or a family vacation to Disney World, creating and sticking to a budget and using money from your checking or savings account is always the best option for paying for a vacation,” says Tad A. Herrington, a certified financial planner with John E. Sestina and Company in Columbus, Ohio. “We’d never recommend anybody take a vacation if they don’t have the cash or savings to do that ahead of time.”

A vacation loan is a personal loan. Some lenders advertise “vacation loans” specifically, but they’re usually referring to a personal loan that’s geared toward people who want to use the money for a trip.

If you don’t have savings on hand for your vacation, here are some alternatives that may help pay for your trip.

Vacation loans 

A vacation loan is typically an unsecured personal loan you use for travel.

These loans require no property or assets as collateral, and you repay the loan in fixed monthly installments over a period of time. Your eligibility and interest rate depend on factors like your creditworthiness and income.

Pros of a vacation loan

There are a few upsides to a vacation loan.

As a personal loan, a vacation loan is an installment loan, which means you’ll have fixed monthly payments, so the amount you’ll pay each month should be about the same.

And unlike a credit card or a line of credit, a personal loan is repaid over a fixed period of time, known as the loan term.

Additionally, the interest rates on personal loans are often lower than credit card interest rates. But your exact loan terms and rate will depend on different things, like your credit health.

Cons of a vacation loan

As with most lines of credit, there are a few drawbacks.

According to Herrington, you shouldn’t take out a personal loan for a leisure trip — even though there are plenty of online lenders that make it easy to apply.

Herrington says that it’s not worth going into debt for something that’s not absolutely necessary. Instead, he advocates for waiting until you have saved enough to pay for the trip outright using your own funds.

If you do take out a vacation loan, you should beware of any potential fees that could inflate the total amount you’ll pay. For example, lenders sometimes charge prepayment penalties if you pay off your loan early.

Pro tip: Make sure to compare loan offers from multiple lenders. You may want to consider lenders whose loans don’t come with prepayment penalties or loan origination fees.

It’s also helpful to pay close attention to the estimated monthly payment and make sure you can truly afford to repay that monthly loan amount. If it would be a tight squeeze on your budget, it may not be worth going into debt to take the trip now.

Lines of credit

While Herrington says it’s not advisable to take out a line of credit just to finance a vacation, it can be another option if you’ve opened one in the past that you can still draw against.

Pros of using a line of credit

An open home equity line of credit, or HELOC, may be an option for you to fund your vacation since the interest rate could be lower than that of a personal loan or a credit card, Herrington says. That’s because it’s secured with your home as collateral.

Another option is a personal line of credit, which can be either secured or unsecured. Lines of credit are a form of revolving credit and offer more flexibility than a personal loan.

That’s because unlike a loan, a line of credit allows you to borrow and pay interest only on what you need, and you can continue to borrow more money once you’ve made payments on your outstanding balance.

Another perk? If you already have a HELOC or personal line of credit open, you won’t have to go through the trouble of applying for another loan.

Naturally, you’ll want to verify that you have money available on your line of credit before going this route.

Cons of using a line of credit

If you use a line of credit, be aware that increasing the balance could negatively affect your credit health. Using a lot of your available credit can signal that you are financially overextended.

If you decide to use money from your HELOC, remember that line of credit is secured by your home. This means defaulting on your payments could result in the loss of your home if the lender repossesses it. So don’t take out money from a HELOC if you aren’t absolutely sure you can repay it.

Before funding your vacation using a line of credit, make sure it has a low interest rate and that you have a plan for paying it off, Herrington says.

Credit cards

Sometimes it may be tempting to reach for a credit card to help finance your vacation. But you should take care to consider the pros and cons of doing this.

Pros of using a credit card

“While you should avoid financing an entire vacation on a credit card, it can be a useful ‘bridge’ to meeting the dollar amount you need,” Herrington says.

“A credit card can be a good option for your vacation if you have almost enough savings to pay for the trip but need just a little more money for expenses or if you have funds coming in soon but need to make a purchase before you have access to it,” Herrington says.

Another tactic to make credit cards work for you is to apply for a credit card that offers an intro 0% APR for purchases, which offers an introductory period, often between 12 and 21 months, where interest won’t accrue on your purchases. That can help give you time to pay off your vacation expenses without the interest adding up.

Just make sure that you can pay off any credit card debt before your introductory rate period expires.

If you have a travel rewards credit card, using it to pay for travel expenses can also help you rack up rewards points. Some travel rewards cards may allow you to earn bonus points for booking flights, hotels or other travel expenses. If you already have existing rewards points, you might be able to cash some in to help pay for your trip.

Cons of using a credit card

Credit cards can have steep interest rates, and if you put your trip on a credit card with a high interest rate, you could end up paying handsomely for the privilege of financing your getaway.

For example, if you put a $5,000 vacation on a credit card with a 20% interest rate and it takes you two years to pay off the amount, you’ll end up spending more than $1,100 on interest alone.

“While a credit card can be a useful tool to help finance a vacation, it can be burdensome if you can’t actually afford the purchases. Before putting any travel expenses on plastic, look closely at the interest rate and determine your payment plan and ability to pay off the card in the coming months,” Herrington says.

How to budget for a dream vacation

Bottom line

While a vacation loan might allow your dream trip to happen sooner, it’s always smarter to budget and wait until you can afford to pay for your getaway with savings. Try tucking away just a little bit each month into a dedicated savings account to get started.

“If it’s purely a vacation for leisure, you’d have so much more peace of mind if you can just find out what you want to do, prioritize that and save up for it,” Herrington says. “Then you won’t be guilt-ridden every time every time you pull out your credit card or spend money on the trip.”

About the author: Emily Starbuck Gerson is a full-time freelance writer in San Antonio who’s been covering personal finance since 2007. She has written for numerous national publications and enjoys helpin… Read more.