How Do Loans For Vacations Work?

Posted on February 6, 2021 in Loans

Given everything that has been happening in the past year, dream vacations may have moved up on the priority list for many people. Quarantines and turbulent finances have made life so stressful that a nice and long relaxation is overdue for many people. 

But vacations can quickly get expensive, so what can be done to afford that dream vacation that we all deserve? Taking out a loan is one option to help get the extra money needed for that vacation or once-in-a-lifetime trip.

What Is A Vacation Loan?

Some lenders will advertise a “vacation loan,” but it is no different than a standard personal loan. The only difference is that the money would be used specifically for a vacation, but it would not be a legally binding item in the loan agreement. These loans would operate just like regular personal loans. 

First, the borrower would apply to a potential lender, and the loan would be reviewed. Factors like credit history, income, and credit score would help determine the maximum loan amount, interest rate, and length of the loan. 

Once the loan is accepted and signed by both parties, the funds will be exchanged, and the vacation can move forward. After the set amount of time, the loan will be repaid in fixed monthly payment installments for the duration of the loan’s terms until the account balance is zero and the loan is closed out.

Pros And Cons Of A Vacation Loan

There are both pros and cons to taking out a vacation loan. It is hard to keep a level mind when your dream destination and once in a lifetime vacation is so close at hand but with finances it is important to look into and measure everything as fairly as possible.

The Pros

  • Decrease Stress and Increase Relaxation

Selling the idea of a vacation may be one of the easiest things in the world. The physical, mental and emotional benefits are very hard to put a price on. The memories and experiences can far outweigh almost any amount of money for some people. 

Ultimately the amount of money being borrowed and spent on a vacation will vary from person to person. Still, it is hard to argue against a good and enjoyable vacation when it comes to worthwhile investments.

  • Reach The Target Amount Faster

With most vacations it is a good idea to plan as much as possible beforehand. The more money that has been saved for the vacation means the less that needs to be borrowed for it. Sometimes a snap vacation opportunity may come out of the blue, but its best to use savings to pay for to vacations, not loans. 

However, a loan can be a good way to help get over the hump and reach that little bit of money that is still required in order to afford the vacation on time.

  • Installment Loans Can Be Stretched

The beauty of installment loans is they can be stretched out for months or even years depending on the terms. Obviously loans can be shorter if requested but stretching them out could help lower the payments per month and make them easier to repay. 

Additionally, personal loans have lower interest rates than lines of credit which will help keep the additional cost down. For example: borrowing $5,000 today to help fund a dream vacation with an interest rate of 8% at 60 months would only be $90 a month to repay. 

It’s important not to get too focused on the present and keep an eye on the future.

The Cons

  • Absolutely Necessary?

It is challenging having to argue against the idea of a dream vacation but when considering financial responsibilities like taking out loans everything must be given a fair consideration. 

While vacations can bring a lot of joy and happiness to someone’s life they are not necessary, like food or shelter. No one should go on a vacation if they can’t first cover their most basic needs. Saving up money and paying with cash is the preferable way to to pay for a vacation instead of taking out a loan. 

Going into debt, even for some wonderful memories, can be a dangerous and unnecessary financial risk in the long term.

  • Interest Rates and Fees

When it comes to taking out a loan, it is important to remember that whatever is borrowed will ultimately be lower than what is owed. Depending on a borrower’s credit information, the interest rate can be very high, and that doesn’t include other potential fees that come with certain offers. Some lenders will even have fees if the account is paid off too early. 

It is very important to weigh out the options of all potential loans and read them thoroughly so as to save as much as possible.

  • Potential Consequences

Taking out a loan comes with some pretty substantial risks financially. It can be difficult to determine how someone’s finances will look five years into the future. Right now the idea of paying a few hundred dollars a month for a loan may seem easy but depending on job security, economic factors and just the nature of life itself that may be quite a challenge in the future. 

Defaulting on a loan by failing to repay it can have devastating long term effects so when it comes to a loan being taken out for a vacation the most important question should be: are the potential risks worth the potential rewards?

Is Using Credit Better Than Getting A Vacation Loan?

If the decision has been made that the vacation is going to be taken despite not having the money on hand, there are some other ways to get the money instead of taking out a loan. One of the easier options would be to use pre-existing lines of credit to fund the trip. 

A large majority of people use credit cards daily, so why not use them in this case instead of going through all the trouble of taking out a brand new loan that will take a long time to repay? The most straightforward answer is that credit cards traditionally have a much higher interest rate, so borrowing the same amount of money with a credit card instead of a loan will cost more in the long run. 

Additionally, the more a credit card account balance has on it then the higher the credit utilization will be on the credit card owner’s credit score. The higher the credit utilization, the more negatively impacted the credit score. While taking out a loan can be a hassle, it is a one time lump sum deal, and you simply can not spend the money if you do not have it. With lines of credit, the debt can keep getting higher and higher, and the more the debt, the harder the negative impact on the credit score. A good rule for credit cards is to use 10% or less of the maximum amount available. A vacation can tend to relax spending habits, yielding a dramatic increase in spending and causing the credit card account balance to grow extremely fast.

The Takeaway

Taking out a vacation loan can help finally get the money needed to go on the trip, but it can be risky and will still require patience and discipline in both spending and repayment in the future. The question to keep in mind should be: is this vacation now going to be worth the sacrifices in the future? 

It can be very easy to focus only on the positives of taking a dream vacation and ignore the potential negatives. Sure the fun and relaxation and memories are all worthy of consideration but they will come with a price tag. Borrowing money should be done out of necessity and it is important to remember that while the fun of a vacation may help in the short term, the financial responsibilities will be there waiting in the future.

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