5 vacation loans: finance your trip

What is a vacation loan and should you get one?

You can use a vacation loan to pay for almost anything you want, including flights, hotels, or any other expense. These loans do not require collateral and you usually pay them back in fixed monthly installments.

Most financial experts advise against taking on debt for discretionary vacation spending. For urgent trips and when a loan is the cheapest option, borrowing may be a good idea. Make sure the monthly payments are within your budget and commit to paying off the loan on time.

Here are the pros and cons of a vacation loan:

Benefits

  • Rates: For well-qualified borrowers i.e. those with credit scores above FICO 690 and high incomes, personal loans may have lower annual percentage rates than credit cards.

  • Lump sum: You receive personal loan funds all at once, rather than over time when you spend the money. Having a fixed amount can help you plan and stick to your vacation budget.

  • Predictable: Personal loans have fixed monthly payments over a fixed term, which means you can plan repayments within your budget. Knowing when to pay off debt also helps you stay focused on your payments.

The inconvenients

  • Risky debt: If you’re struggling to pay off other debt, a vacation loan could add financial stress. Even a missed payment could have a major impact on your credit score, and you’ll incur late fees while earning interest, making your trip more expensive than you expected.

  • Long term: The terms of personal loans can be up to seven years – long after you return home. Carefully consider how long it makes sense to pay for your trip.

How much would that cost?

The APR for personal loans ranges from 6% to 36%, and some online lenders can use the reason you are getting a loan to decide your rate and loan amount. For example, LightStream charges a lower minimum APR for kitchen renovation loans than for wedding loans.

The rate you will ultimately get depends primarily on your credit score and the percentage of your income that is spent on other debt each month, also called your debt ratio. The higher your credit score and the lower your DTI, the more likely you are to get a low rate on a vacation loan.

For example, a 2 year loan of $ 2,500 with an APR of 6% would cost about $ 111 in monthly payments and $ 2,659 in total.

That same loan with a 36% APR would require monthly payments of $ 148 and cost $ 3,543.

Alternatives to vacation loans

Before taking out a loan, consider these alternatives to finance your trip.

Savings: If you have the time, start saving. Create a dedicated travel savings account and set aside money every month. Find out the price of your trip by comparing the prices of flights, hotel rooms and car rentals on travel websites like Expedia and Kayak.

Travel credit cards: If you travel frequently and have good or excellent credit (690 or greater FICO), you may be eligible for a travel credit card which offers a sign-up bonus and other perks that could help lower the cost of your trips in the long run.

0% credit card: If you have good credit, you may also qualify for a low interest rate or 0% introductory APR card this allows you to keep an interest-free balance for 12 to 18 months. This means that if you can pay off your trip at that point, you can ignore the interest altogether.

Point of sale travel financing: Some lenders like UpLift and To affirm have partnered with major airlines and travel websites to include financing options for travelers when booking their tickets. These lenders target people with average credit who may not qualify for a travel card.

How to get a vacation loan

If you’ve decided that this is your best option, you can get a vacation loan in four easy steps:

  1. Check your credit report to see if you are doing your best. Correct overdue accounts or errors before applying.

  2. Compare lenders to see what each offers and decide which loan features are important to you (e.g. fast financing, a mobile app to manage your loan, choice of payment date).

  3. Pre-qualify with multiple lenders to see which one can offer you the lowest rates and repayment terms that fit your budget. Prequalification does not affect your credit score.

  4. Gather your documents – including W-2s or pay stubs, your social security number, and bank account numbers – and submit your application.

About Emilie Brandow

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