A loan may seem like your ticket to a dream vacation when you lack the cash to cover the hefty price tag upfront. A vacation loan is simply another name for a personal loan or a buy now, pay later service that you use for travel.
But that vacation loan you use to finance your seven-day Caribbean cruise could leave you shackled to debt for years and affect your ability to obtain credit when you need it.
Before you take out a travel loan, do your due diligence to ensure that it’s the right move. While some situations may merit the loan, it’s generally best to avoid going into debt for travel.
What Is a Vacation Loan?
A vacation loan is a form of financing you can use to pay for a trip, typically as an unsecured personal loan. This means you don’t need to put up collateral to get approved. You’d need to apply for a personal loan for a vacation before booking your trip.
In recent years, though, buy now, pay later, or BNPL, services have emerged, allowing travelers to obtain a loan during the checkout process when they are booking their hotel room or flight. Companies like Uplift partner with airlines, cruise lines and other travel providers to divide the cost into smaller payments, so you don’t need to pay all at once.
How Do Vacation Loans Work?
The general idea of a vacation loan is to spread out the payment of a booking over several weeks, months or even years. If you opt for a personal loan, for instance, repayment terms generally range from two to seven years, but some lenders may offer shorter or longer terms.
The interest rates for personal loans tend to be lower than those of credit cards. You will pay an average rate of 9.41% on a 24-month personal loan, compared with 16.17% for a credit card, according to February 2022 data from the Federal Reserve. That said, some personal loans come with interest rates that can climb upward of 30%.
If you choose a point-of-sale loan via a BNPL service, the terms can vary depending on which service you choose. For example, some will allow you to make four equal installments over six weeks interest-free, while others may offer terms of up to a year, with annual percentage rates ranging from 0% to higher than 30%.
Regardless of which option you choose, the exact terms of your loan will depend on your creditworthiness. If you have less-than-perfect credit, you may have to look harder to find an affordable option.
Pros and Cons of Vacation Loans
Whether it’s the pressure from social media or the feeling that you deserve a break, justifying a loan for your dream vacation is easy. But taking one out may end up causing more problems than it solves, and for most people, it’s best to avoid going into debt for a trip.
Before you make any financial decision, it’s crucial to take a look at both the benefits and drawbacks. Here’s what to consider with loans for vacation.
For the most part, the benefits of vacation loans come down to convenience. Every situation is different, so carefully consider how a vacation loan could help you. Examples include:
You don’t need to wait. It can take several years for some people to put together the cash required to book a vacation. With a personal loan or BNPL service, you don’t have to wait to get the break you’re hoping for.
You may get affordable terms. If your credit is in great shape, you may be able to qualify for a low enough interest rate to feel comfortable going into debt for something you may not necessarily need.
While vacation loans aren’t all bad, their appeal can quickly fade once you return from your trip and need to start making payments. “The reality is if you really can’t afford it and it’s not in your budget, it’s not something you should be purchasing,” says Leslie Tayne, debt resolution attorney, author and founder of Tayne Law Group in New York.
Yes, travel loans may be better than credit cards and other options to cover travel costs. But think twice before you take one. Some of the downsides of a vacation loan:
It can add unnecessary stress. A 2018 U.S. Travel Association survey says 82% of Americans travel to relax and reduce stress. But taking on debt, such as a travel loan, to fund a vacation can add stress in the long run.
“Traditionally, when someone uses a vacation loan, it’s an indication that they’re not saving and budgeting properly,” says Kent Fisher, a certified financial planner at Southern Investment Management Collective.
And if you already have a hard time saving, then paying monthly for travel over several years could make it that much harder. Even if you can afford your payments, the loan will make managing financial risks down the road more difficult.
Tayne asks, “What happens when something comes up that’s an emergency or a requirement for money, and now you have this responsibility to pay back this loan for a vacation that you took?”
It can be expensive. Even if you qualify for a good interest rate on a personal loan, interest charges can add hundreds – or even thousands – of dollars to the cost of your vacation.
Let’s look at an example using a $5,000 loan repaid over two years. If your credit is good, you might have an APR of 10.63% and pay $572 in interest on your vacation. If your credit isn’t in great shape and your interest rate is 35%, the cost jumps to $2,022.
A longer-loan term may reduce your monthly payment, but you will pay more in interest.
Vacation loans may also include origination fees, which can add to the cost of your trip. Not every lender charges an origination fee, but when a lender does, the fee figures into your loan’s APR.
Fees typically range from 1% to 6% of your loan amount and often come out of your loan proceeds. If you take out a $5,000 loan with a 5% origination fee, you would receive $4,750.
Once you factor in fees, your estimated loan amount could be off the mark. You may need to borrow more for a trip than you had planned.
“Most people don’t really stick to budgets when they go on vacation,” Tayne says. “There’s a lot of justification for overspending on vacation, and that generally creates more debt.”
It can limit your borrowing options in the future. Virtually every time you borrow money, that debt is added to your credit report, and lenders can view it when deciding whether to extend you credit.
“A person can only borrow so much money,” Fisher says. “If you’ve used up some of your loan capacity to take on a personal loan to go on vacation, you’re limiting your options on what you can do.”
Mortgage lenders, for instance, may limit how much you can borrow if your debt-to-income ratio – your total monthly debt payments divided by your gross monthly income – exceeds 43%.
Even if you’re not planning to buy a home or borrow money for other reasons in the near future, a lot can happen in a few years. If your car breaks down and you need a new one or your views on homeownership change, you may regret your vacation loan.
Whom Vacation Loans Are Best for
Ideally, you will budget for your travel and pay for it with cash you’ve saved. But in a pinch, a loan can finance your trip when you do not have other options, such as credit card rewards or room in your regular budget. You might need a vacation loan for:
Emergency travel. If a loved one is sick or injured, or has died, you may need to use a travel loan to get to family. If your travel plans are urgent, make sure to search for personal loans from lenders that can provide quick cash.
Once-in-a-lifetime trips. Special circumstances may justify vacation loans, Fisher says, although avoiding them is still best.
As long as someone is financially disciplined, he says, “I can see a case being made for a young person making a once-in-a-lifetime trip … and saying, ‘I know that I’m dipping into future reserves to consume today.'”
How to Choose a Vacation Loan
If you’re dead set on taking out a loan to pay for a trip, it’s important to avoid taking the first offer you receive. Take some time to shop around and compare personal loans and BNPL services to get an idea of what’s available and the terms of the agreement.
For BNPL services, you’ll typically need to go through the checkout process and apply. The provider may only run a soft credit check to determine your eligibility. Many personal loan providers also offer prequalification with just a soft credit check.
In addition to the interest rate, you’ll also want to compare how long you’ll have to pay back the debt and the monthly payment amount. While an interest-free option is appealing, it might not make sense if the repayment term is short and you can’t afford the payments.
Finally, consider the credit-building aspect of both options. “Some BNPL service providers won’t report the debt, which won’t help you if you’re trying to build or rebuild your credit,” says Tayne.
Regardless of which option you choose, Tayne recommends reading the fine print before you commit.
Vacation Loan Alternatives
Other spending options provide the same experience – if not better – without the drawbacks of vacation loans. Alternatives include:
Savings. The best way to pay for a vacation is sometimes the old-fashioned way. Saving for a once-in-a-lifetime trip can take time, though. If you’re hoping for a vacation sooner than later, perhaps set your sights on a more affordable trip.
Look at your income and expenses, and find ways to redirect certain expenses toward your savings. If you can’t do this, consider ways to earn a little extra cash to set aside just for travel.
Credit card rewards. Travel credit cards allow you to travel for less and, in some cases, nearly for free. By signing up for one or more credit cards and earning their sign-up bonuses, you could use points and airline miles to cover flights, hotel stays, rental cars and more.
If you want to go this route, though, you must have a plan to use credit cards responsibly. That includes sticking to a budget to avoid spending more than you earn in rewards and paying your bill on time and in full every month to avoid interest charges.
Flexible plans. If you have saved some but not all the money you need for a trip, you could shop for deals that could make your dream vacation a reality. Many travel websites offer deals on flights, hotels, cruises and more, but you often need to be flexible with your travel dates and even destinations.
Thinking creatively can also help you score a great experience for less. “You can go online and get a million different suggestions on how to have the best staycation or vacations on a budget,” Tayne says. “When my college-age kids go on vacation, they don’t have big budgets, and they find really interesting ways to go on vacation and save money.”