Should You Get A Vacation Loan? A Complete Guide
Whether you want to knock a far-flung destination off your bucket list or sneak off for a getaway closer to home, a vacation might be calling your name. If you don’t have the funds you need to cover the costs of a trip, vacation loans present an appealing solution. While vacation loans can open doors for some, most will be better off avoiding these loans.
What Is A Vacation Loan?
A vacation loan is a type of unsecured personal loan, which comes with few rules about how you can spend the funds. With that, most personal loans can be used as vacation loans, even if that’s not an option advertised by the lender.
Like other unsecured personal loans, approved borrowers get access to a lump sum of funds upfront. You won’t have to provide collateral, but you will have to repay the borrowed funds and the attached interest.
The Benefits Of Using A Personal Loan For A Vacation
Some advantages of using a personal loan to fund a getaway include:
- Fast funding: It might only take a few days, or less, to get your hands on the funds.
- Lump sum: You’ll get access to all the funds upfront, making it easier to pay for your trip.
- No collateral: You won’t need to pledge an asset to gain access to the funds. With that, you won’t risk losing your asset, like a car or home, due to late payments.
- The possibility of low rates: For some borrowers with good credit scores, the interest rates tied to personal loans can be lower than credit cards.
- Fixed monthly payments: Fixed payments mean you can carve out a set amount in your budget for paying back the loan.
The Drawbacks Of Using A Travel Loan
Of course, there are also some disadvantages to using a travel loan.
- Extra debt: You’re signing up for more debt, which can put pressure on your overall financial situation. If you choose to take on debt, make a plan to pay off the debt
- Lack of a tangible investment: A vacation might come with amazing memories, but you won’t walk away from the loan with a valuable asset. For example, a vacation won’t have any monetary value in 5 years, but a house probably will.
- Repayment timeline: Personal loans can come with terms of several years. If you use the funds for a vacation, you might be stuck paying for that trip for years to come.
- Interest payments: Like all loans, you’ll be required to make interest payments. Ultimately, interest payments will increase the cost of your trip.
How Much Does a Vacation Loan Cost?
Personal loans come with annual percentage rates (APR) attached. In February 2023, the average personal loan interest rate was 11.48% for a 24-month loan, according to the Federal Reserve Bank of St. Louis. However, your actual personal loan interest rate will vary based on your unique financial situation.
Let’s say that Pat takes out a $5,000 personal loan to fund a vacation. If they face an 11.48% interest rate over a 24-month loan term, they’d have monthly payments of $234. Over the course of the loan, they’d pay $619.72 in interest.
When Does A Loan For A Vacation Make Sense?
The decision to take out a loan to cover vacation costs is a very personal one. While some might never consider using a personal loan to fund a vacation, others might be willing to take on the monthly payments for certain situations.
Here are some questions to ask yourself before taking out a loan to cover vacation costs:
- What is my financial situation? Consider what interest rate you might qualify for and whether the monthly payment fits comfortably into your budget.
- Is this a once-in-a-lifetime opportunity? The trip of a lifetime might tempt you into taking out a personal loan. Be sure the trip is worth it to you based on your goals before taking out the loan.
- Is this opportunity expiring? If you can’t come up with the cash in a limited timeframe, a vacation loan could help. For example, you might want to see your favorite artist on their final tour or make a visit to elderly relatives in faraway places before it’s too late.
- How long will it take to pay the loan back? Ask yourself how long you’re willing to pay for this vacation. Depending on the situation, you could be stuck paying this loan back for years.
- How does this impact my other financial goals? Taking a vacation likely isn’t your only financial goal. Consider how this monthly payment might impact your other plans, like getting out of debt or saving for retirement.
Of course, only you can decide if a vacation loan makes sense for your situation. Be honest with yourself before taking the plunge.
How To Get A Vacation Loan
If you determine that a vacation loan is right for you, here’s how to get a personal loan:
- Check your credit score and prepare finances. A good credit score and high monthly income can help you tap into the best interest rates. If you don’t have a great credit score, consider building it before applying for the loan.
- Choose a lender. A little bit of research can go a long way. Find a lender offering the loan terms you need at an interest rate you can afford.
- Apply for the loan. Be prepared to provide extensive information about your financial situation. You’ll likely need to provide documentation to back up the information on your application.
Taking a vacation isn’t the only reason to take out a personal loan. Other popular personal loan uses include paying for a home renovation, consolidating debt or covering a major expense.
Vacation Personal Loan Alternatives
A vacation loan isn’t the right choice for everyone. Here are some alternatives to consider.
Personal savings present the ideal way to pay for a vacation. When you dip into your savings, you won’t have to incur debt or pay interest to enjoy your destination. If possible, build a savings plan to cover your vacation.
Some credit cards offer rewards when you pay for vacation-related expenses. In some cases, you can parlay these rewards into a significant discount on your dream vacation.
Another option is to opt for a credit card with a 0% APR for an introductory promotional period to help you avoid paying interest on the loan. If you go this route, make sure to read the fine print to avoid unexpected interest charges.
Credit cards are only a good solution if you can responsibly pay off your balance each month or have a plan to pay off the balance over time.
Lines Of Credit
A personal line of credit offers access to a spending limit, which is different than the lump sum you obtain through a personal loan. The increased flexibility gives you the opportunity to avoid spending more than is necessary on your trip.
If you are a homeowner, you might choose to use your home equity as collateral for a home equity line of credit (HELOC) to pay for the vacation. With collateral involved, you’ll often find lower interest rates. But remember, you’re using your home as collateral and could lose it if you don’t make your payments. Some lenders, including Rocket Mortgage®, do not offer HELOCs.
Scale Down The Trip
An expensive vacation isn’t always the right fit for your budget. If you’re struggling to pay for a trip, consider scaling down the costs. When you opt for a more affordable trip, you’ll gain peace of mind to help you enjoy the experience. Plus, you won’t be stuck making monthly payments when you get home.
Vacation Loan FAQs
You have questions about vacation loans. We have answers.
Is it smart to take out a loan for a vacation?
Taking out a loan to fund a vacation is a very personal decision. It’ll depend on many factors, including your financial situation, whether you’ll be able to pay back the debt and whether you feel the trip is worth the added expense of interest that may accrue.
What credit score do I need to finance a vacation?
Credit score requirements vary from lender to lender. However, most lenders require a minimum credit score between 640 and 650. Some lenders may allow a lower minimum credit score but at the price of a higher interest rate.
Why wouldn’t I want to get a loan to take a vacation?
A vacation loan comes with interest obligations attached, which will ultimately increase the cost of your trip. Depending on your situation and loan term, you could be paying back this vacation loan for years to come.
The Bottom Line: Make Sure Your Trip Is Worth A Vacation Loan
A personal loan can help you cover vacation costs. But the monthly payments could impact your budget. If you’re considering taking out a loan to cover your vacation, weigh the pros and cons carefully.
If you decide to move forward, apply for a personal loan with Rocket LoansSM.