Should I Use a Personal Loan for a Vacation?

Whether they involve discovering distant lands or exploring stateside attractions, vacations have the power to both ignite your imagination and soothe your soul.

However, they can also put a big dent in your bank account.

If you don't have cash set aside to pay for an extended excursion, a vacation personal loan may be a solution worth studying. Here's your crash course in borrowing money for travel.

What Is a Personal Loan for Vacation?

A vacation loan is a personal loan that you can use to cover travel-related costs, including transportation, hotels, rental cars, meals, and other expenses. With a vacation loan, you finance a trip in regular installments over time rather than in one upfront payment.

How Vacation Loans Work

Most vacation loans involve an unsecured personal loan. Instead of providing collateral, you qualify based on your creditworthiness and your personal pledge to pay back the debt.

Personal loans for vacations allow you to borrow a lump sum of money and repay it — with interest and any additional charges — and in monthly payments over an agreed-upon timeframe. Products and terms vary among lenders, but contract lengths typically extend from 12 months to five years or longer. Loan limits generally range from $1,000 to $100,000 or more.

As with any personal loan, the most important component of a vacation loan is the interest rate. This is calculated using an annual percentage rate (APR) and will determine the final price you pay to finance your trip with borrowed funds.

Interest rates, which vary among lenders, are largely impacted by your credit score, income, and other factors. However, rates for vacation personal loans usually range from 5% to 36%, with the average rate hovering around 10%.

Pros and Cons of Using a Vacation Personal Loan

You’ll want to consider several factors when deciding whether to take out a vacation loan.

Vacation Personal Loan Advantages

Fixed payments

Since a vacation loan is an installment loan, you'll pay the same amount each month over the length of the agreement.

Lower Interest Rates

Unless you qualify for a no-interest credit card, you'll probably get a lower APR using a vacation loan than by putting travel expenses on a regular credit card. Plus, the rates on a personal loan won't fluctuate like they can with revolving credit.

Numerous Options

Personal loans are available from many credit unions, banks, online lenders, and other sources. You'll also find a variety of loan options and repayment terms.

Vacation Loan Disadvantages

Higher Costs

The interest you'll pay over the life of a vacation loan could add hundreds, or even thousands, of dollars to the overall price of your trip.

Ongoing Payments

When you take out a vacation loan, you're left making payments long after you've returned from your getaway. In some cases, this extra monthly bill can make it more difficult to meet your normal obligations.

Additional Debt

Anytime you take out a personal loan, you're taking on debt. This increases your debt-to-income ratio, which can make it difficult to obtain another loan if you need one. And if you default on your loan, it can damage your credit for years.

When Vacation Loans Make the Most Sense

Most financial advisors recommend that you never borrow money for discretionary spending like a vacation. The rationale: If you don't have the money in your checking or savings account to pay for a trip without going into debt or dipping into your emergency fund, you can't really afford it.

That said, a personal loan might be a viable (or your only) option if you're suddenly faced with an unplanned business or personal trip, emergency travel, or a once-in-a-lifetime vacation opportunity. Depending on the rate and term you can obtain, a vacation loan could prove cheaper in the long run than putting the expenses on a credit card.

Another situation in which it could make sense to use a vacation loan is if your income fluctuates throughout the year. You could finance your trip during periods of lower income, knowing your income will be increasing soon, allowing you to pay off your loan during the high-income periods.

How to Get a Vacation Personal Loan

Regardless of the reason, if you decide to take out a vacation loan, there are some things you can do to ensure you find one that meets your needs and budget.

In fact, there are five steps to getting a personal loan.

Vacation Loan Alternatives

Escaping for a week or two is a great way to rest and recharge, especially when you don't have to worry about going into long-term debt to do it. Here are some common alternatives to taking out a personal loan for a vacation.

Personal or Travel Savings

Cash that you've set aside is far and away the best way to pay for a vacation. Whether you tap into your regular savings or establish a separate account that you contribute to over time, funding your trip with money you have on hand trumps any loan agreement or repayment schedule.

Interest-Free Credit Cards

If you choose to pay for your vacation with a credit card, try to find a card with a promotional 0% financing period. You can use this type of card to charge travel expenses and have plenty of time — sometimes 15 to 18 months — to repay the debt without interest.

Or, you could search for a credit card that offers 0% intro APRs on balance transfers, pay for your trip with a current card, and then move the charges to the new card. This would also allow you to pay down the debt over time without accruing interest (though you may be charged a balance transfer fee).

Travel Rewards

A travel reward credit card offers numerous travel benefits, including points that can be redeemed for airline flights or miles and hotel rooms. You can use these cards for everyday purchases prior to taking a trip and (hopefully) accumulate enough points to help lower the cost of two of the most expensive aspects of travel: transportation and accommodations.

Personal Lines of Credit

With a personal line of credit, a lender approves you for a certain amount of money that you can tap into and pay back as needed over time, rather than taking the full amount of the loan at once. You're only charged interest on the portion of the loan that you use, and the line of credit becomes available again as you pay down the balance.

The Takeaway

Everyone needs to get away from time to time, and money doesn't necessarily have to derail your plans.

Set a budget, get creative, and if it aligns with your personal finances and long-term goals, consider a vacation personal loan or an alternative funding strategy.

Then, jet off on your next great escape and start making memories rather than stressing about payment plans.