A vacation may seem ideal if you need a break from your monotonous life. If you’re interested in taking a break from your stressful job to recline on a beach, you may start looking for a personal loan for vacation. But before applying with a personal loan/installment loan lender, consider the pros and cons of vacation financing.
What Is a Vacation Loan?
Vacation loans are short or long-term loans with an installment payment plan. Many people use personal loans to finance a vacation because they have flexible approval requirements, and don’t require collateral. You could be eligible for a personal loan despite a low credit score if you can provide proof of reliable income.
The benefit of a vacation loan is that you can enjoy it now and pay later. Suppose you want to book an all-inclusive Caribbean vacation but lack the money. In that case, you can apply for a personal loan. You can pay off a costly vacation through monthly payments made over a few months or years.
What Are the Pros and Cons of Vacation Loans?
A vacation is great for your overall happiness and mental health. Using a personal loan to afford the cost of a luxury vacation seems like an easy choice to make. But there are several factors to consider, such as the long-term effects on your finances.
Pros of Vacation Loans
Read about the perks of using loan proceeds from a personal loan to go on vacation:
Instant Gratification
The single most significant benefit of using a vacation loan is instant gratification. If you want to plan a vacation now and start counting the days until takeoff, a personal loan can help you make concrete plans. You do not have to wait until you save enough money since a lender will provide a lump sum payment.
Accessibility
Personal loans can be even very convenient if you apply with online lenders. You can avoid the hassle of traveling to a store location and waiting in line by simply starting an inquiry from home. The online loan approval process is streamlined and quick. You could get credit approval despite a low credit score if you can show proof of your ability to make payments on time.
Convenient Terms
Various vacation loan options are available, but a personal loan may offer more convenient loan terms. Personal loans typically have fixed monthly payments, so you always know how much you have to pay and when the payment is due.
The loan amount is highly flexible with personal loans. You could quickly get a few thousand dollars to book a guided tour of the French countryside! But if you only need 100 dollars right now, know that the minimum loan amount is low. You do not have to take out more or less than what you need with personal loans.
Cons of Vacation Loans
Using a personal loan to afford the cost of a vacation is convenient, but there are cons to consider.
Unnecessary Stress
Having to pay off another loan can add more stress to your life. If you struggle to pay down your debts, taking out a vacation loan may not be ideal for your finances.
If you cannot afford the cost of a vacation without taking out a personal loan, your budgeting plan may need some work. Suppose you are experiencing difficulty saving money for a coastal getaway. In that case, you may struggle more after taking on one more loan. Even if the loan terms are affordable, adding an extra bill to your calendar can make it harder for you to afford additional large purchases in the future.
High Cost
A personal loan can be expensive, even if you acquire affordable loan terms. A longer repayment length will reduce your fixed monthly payments so you can maintain necessary expenses like a flexible grocery shopping budget. However, you may end up paying thousands of dollars in interest fees over several years!
Suppose you pay off a $2,000 personal loan over 12 months. If the APR rate is 199%, you will end up paying $3,980 in just interest fees! You could use that extra money to afford another vacation or pay off credit card debt.
Limited Future Financial Options
Your loans and credit card debt will appear on a credit report for lenders to review. If you plan on borrowing money in the future, your financial options may be limited. Lenders tend to avoid working with high-risk borrowers with too many debt payment obligations. A vacation loan may prevent you from qualifying for a mortgage loan or auto loan in the future.
If you’re working on improving your credit score, keep in mind that a high debt to income ratio can decrease your credit score. If your debt exceeds 28% of your income, your credit score will decrease by a few points. Lower credit scores will limit your financial opportunities and raise your monthly payments.
Can I Afford To Take Out Personal Loans?
If you are deadset on taking out personal loans to afford the cost of a well-deserved vacation, consider if you can afford the cost. Many personal loan lenders offer informative resources online for potential borrowers, such as a loan calculator.
You can use an online calculator to determine your monthly payments and what you will spend on interest fees. To get an idea of the overall cost of borrowing money, you will need to know the loan amount, APR rate, and repayment length.
Suppose you apply for a vacation loan and determine you cannot afford the monthly payments. In that case, you can talk to a loan officer about adjusting your terms. An extended repayment length will lower your monthly payment, but you will pay more through interest fees.
Is There a Good Time To Use a Vacation Loan?
Financial experts agree that borrowers should avoid taking out unnecessary loans that do not add anything to their financial portfolio. A vacation loan is ideal for emergency travel, such as when a family member is sick, or a loved one has recently passed away.
Of course, you are free to apply for loans at any time. If you think a vacation is what you need right now, it may be best to take one! But ensure you compare multiple loan offers before formally applying with a lender. Personal loans offer decent interest rates for borrowers, but some lenders offer additional fees. Avoid working with personal loan lenders that require a loan origination fee or penalize you for paying your loan early.
Budgeting and Debt Payment Methods To Afford a Vacation
Various budgeting and debt payment methods allow you to tackle debt and grow your emergency fund quickly. If you want a vacation, try establishing a plan first.
100 Envelope Challenge
Need a lot of money to afford that dream vacation to Hawaii? Learn how to do the 100 envelope challenge to save $5,000! The envelope budgeting method requires you to have one hundred envelopes numbered from one to a hundred. Each day you will pick an envelope randomly and store the exact amount of cash labeled on it. Continue this process until no envelopes remain at the end of 100 days!
The Zero Sum Budget
The zero sum budget can help you organize your finances by making sure you “spend” all of your income. The “spending” categories actually include savings, which can be the perfect way to save for vacation!
Avalanche Method
If you are repaying multiple loans, the avalanche method helps you save money by working on paying off your high-interest debt faster. Pay the minimum amount for most of your debts, but use your excess cash to repay your high-interest loan. This strategy helps you avoid paying high amounts of interest fees. Although this method takes longer to see results, you will feel motivated to keep going once you pay off your most burdensome loan.
Snowball Method
The snowball method is the direct opposite of the avalanche method. Instead of repaying your debt with the highest interest rate, you focus on paying your small debts first. Suppose your smallest loan amount is $500. That is the debt you should work on paying off first. This debt payment strategy is very motivating because you end up paying off more loans quickly.
References:
Should You Use a Vacation Loan to Finance Your Next Trip?
The Truth About Using Vacation Loans
