Ask any financial expert and they will tell you the best way to finance your vacation is to save up for the vacation you want to take. Borrowing money for disposable items — food, gas, or yes, travel — leaves you paying the costs long after the vacation buzz, the suntan, or the family memories fade. Paying down a vacation loan may not be as glamorous or festive as the excursion.
Of course, travel these days is often dictated by a variety of factors, such as finding deals on flights and hotels, planning a family gathering that is dependent upon a specific timeframe, such as Grandma's 80th birthday, and what may be happening in the airline or cruise industry at any given time. While it's best to save in advance, life doesn't follow the predictability of your budget schedule or the balance of your bank account.
If you do need to pay ahead, credit cards are really just another type of travel loan. If your savings account does not have the flexibility to get you to your best college buddy's somewhat impromptu destination wedding, it may be time to consider a vacation loan that doesn't wreck your budget.
Traveling for fun, family, or both
The type of financing you need depends on the type of vacation you need: whether you want to go home or get away. When visiting family, finding ways to save on the bottom line are more necessary, like when you forego a pricy hotel for a guest bedroom with your kin folk. Either way, the first best step is to set realistic expectations for your travel expenses.
Flying or driving? Shared expenses or footing the bill? Rental car to get around at your destination or will you just pop your umbrella at the resort and stay put? Are you expecting baggage fees because the airlines are expecting you to fork over those costs, too? How high is the price of gas at your destination? As you start to consider all the travel variables, the natural impulse might be to just rely on your credit card. You expect you'll be able to pay down the extra costs within a year — maybe a year and a half — but this leaves you with an even bigger unknown when you return home: How much did this vacation actually cost?
Another key factor is whether this excursion bumps into other periods of time when your budget is already pinched. The holidays frequently come to mind, as travel and gift-giving both impact the monthly budget, plus the travel expense may be higher during peak travel periods. Likewise, a late summer vacation might align with additional back-to-school expenses, or spring break might bump up against the April 15 tax payment you knew was coming. At moments like these, developing a financial plan might be necessary even if you do have a travel nest egg in your account.
In the end, it is far easier to slide into the habit of putting lots of little expenses from a meal with old friends to a book to read on the airplane, on your credit card if you prioritize the debt this way. Finding an alternative plan — one that aligns with your budget — might require a bit of advance planning.
How do you get a vacation loan?
When we're talking about "vacation loans," that's basically a specific intended use for a personal loan or a credit card loan. Either way, you are expected to pay off the loan in monthly payments. whether you call it a "holiday loan," "travel loans," or simply a collection of charges on your credit card.
Having an expected cost for how much money you will need requires a bit of planning on your part. There's no reason to borrow more than you need, but you also want to make sure you borrow enough for a week-long outing if that's what your plans include. You might also consider if you have enough in your current account to cover the cost of everyday expenses like gas and food — expenses you would be paying anyway if you were spending a typical week at home.
Like any loan, you'll need to apply through the standard loan application process, and the lender will review your credit history and worthiness in order to finalize the credit approval. Basically, as with any unsecured personal loan, you'll need to show your ability to make on-time monthly repayments. If you have a local community bank where the staff knows you, they may even have a better understanding of your overall financial position, your family's big reunion plans, or the ability to allow you to negotiate the interest rate and any other repayment term based upon your history with the bank or credit union.
Once you complete the loan application and approval process, those funds can be placed in your checking account via direct deposit and you are ready to hit the road.
Why does a personal loan make sense for travel?
Think about it this way, though: if you were considering buying a snow mobile to enjoy the winter sports close to home, would it make more sense to put the cost on your credit card, or to apply for a loan to manage the cost? If your credit score and overall financial situation allow you to plan for a loan to take advantage of a set payment plan and a more appealing interest rate, that seems like a smarter way to borrow.
So let's look at your travel plans as a single expenditure. Adding up the cost of the hotel, rental car, airfare, and on-site expenses can give you the basis for a personal loan that can be deposited in your checking account and used to manage your out-of-town costs. But unlike a credit card, a personal loan won't have a variable monthly payment. You will know up front what you will be expected to pay month-over-month. You will also know how many months you will have to pay off the loan, independent of any other charges that may happen to also show up on your credit card.
A secured loan, like a vehicle loan, requires collateral (the snow mobile itself), but a vacation loan is an unsecured loan, which isn't backed up by any assets. You are putting up your good name — and your equally good credit score — as proof of repayment. Again, if you can pay for a vacation out of savings, you should. It's better to budget in advance and live within your means.
What are the perks of a personal loan for travel?
A credit card is good for these "out of sight, out of mind" moments like when you're sitting beachside under your cabana, but can lead to a rude shock once you're back home and the bill comes due. When you take out a personal loan for holiday travel, you know exactly how much money you're taking out, exactly how much you're paying back each month, and exactly when you will finish paying off your loan amount.
Credit cards are basically tiny loan machines: When you rack up a charge, you technically take out a loan in that amount, and when your credit card bill comes due, you pay that back, plus interest. Using one on a vacation is easy, but less delightful when the bill arrives month after month. Getting a personal loan interest rate that improves over your credit card interest rate serves as the main reason you might opt to pay for your travel with a loan rather than your card: a better interest rate on a personal loan than you'll have on your credit card.
If you make your loan repayments on time, you could end up spending less money on your holiday getaway by quickly repaying a timely loan rather than spreading all the costs across your credit cards. If you happen to choose a Kasasa Loan™, you have the added benefit of using Take-Backs™ to pay ahead to save on interest and still use those extra funds if you need them.
Should I leave my credit card at home?
No, there are a few advantages of still using your card as you travel. Especially when you are traveling abroad, currency exchange rates upon arrival are often best obtained in bulk.
Many credit cards offer travel rewards, so if you want to borrow smarter and earn those extra bennies, use your card for the initial payments, and repay those charges in full when the bill arrives to avoid any interest charges.
Keep in mind that a personal loan does increase your overall debt, and you may find a personal loan also comes with a longer loan term. If you think you can pay off your credit card in full when you get back from your vacation, that's likely an easier option. Because your credit utilization is based on your full credit line on your card, a personal loan adds to that total amount of debt.
If you tend to keep your credit card tucked away and only pull it out for emergency use, then consider it to serve in that same capacity while you are away from home in case the ski trip gets extended thanks to Mother Nature. Although, a personal loan can also serve in a similar capacity. If that new grand baby arrives early, you can still use a personal loan to get there because you already planned to borrow for the trip. You already received your loan approval, you just are heading out sooner than expected to meet your new granddaughter.
Long-term financial plan versus short-term vacation plans
Ultimately, the prospect of using a personal loan for a vacation expense offers similar benefits as using a credit card to pay for your travel. The best vacations are the ones where you truly unwind and enjoy the company of those around you without the hassle of paying for it after you return home. If you want to avoid the sticker shock of credit card fees and interest rates plus the indefinite payment plan of your credit card loan, and you want to keep your expenses in line, consider cost-saving options and plan to use a personal loan to budget responsibly when it's an excursion you just don't want to miss.
Discover more about the Smartest Way to Borrow in our previous blog post, "Consider your finance options when making a big-ticket purchase."