Vacation Loans: How They Work and When They Make Sense

A vacation loan is an unsecured personal loan used for travel. Your monthly payments will be fixed, and the costs are spread out over a period of time. However, the total interest you pay can increase the cost of your trip.

Here's how a vacation loan works and whether an alternative way to finance your trip may be a better option.

What Is a Vacation Loan?

A vacation loan isn’t a separate loan type. It’s a personal loan used for travel expenses. The loan can cover the following:

• Flights: The loan can cover domestic and international flights.

• Hotels: The funds from the loan can help pay for all-inclusive resorts, as well as hotels for an extended stay.

• Excursions: You can use the funds to pay for guided tours or experiences during your vacation.

• Logistics: You can use the funds to pay for rental cars, bus passes or other incidentals during your travels.

Get a Personal Loan To Finance Your Vacation

Using a personal loan to finance your vacation is a common strategy. To use the loan to your advantage, double-check if it fits with your overall financial picture. If you can comfortably afford the monthly payment, it may seem like a good strategy. However, if paying for the interest means you’re making payments long after your vacation is finished, it may not be an ideal option.

How a Vacation Loan Works

You don’t have to provide collateral for a vacation loan. Here’s how they work:

• Lump sum: You receive a lump sum payment once you’re approved for a loan.

• Fixed payments: You pay the loan back in fixed installments. The installment payments may be spread out over 12 to 60 months.

• Interest: The lender charges interest on your principal. It’s possible for the loan to cost more than the price of the trip.

Example of Cost of a Vacation Loan with Interest

If you get a personal loan of $10,000 and the interest is 12.72%, here’s a table to show how much interest, you’ll accrue:

Pros and Cons of Personal Loans

Using a personal loan to fund a vacation comes with advantages and disadvantages.

Here are the pros and cons:

Pros

• Fixed costs: Personal loans, unlike a credit card, have predictable monthly payments that can make trip costs easier to plan.

• Coverage for large expenses: A lump sum can cover large travel expenses like flights or all-inclusive resorts.

• Preserve your emergency funds: You can use your loan to spread the costs of your vacation over several months or years — this approach prevents you from dipping into your savings for your trips.

Cons

• Interest inflation: The interest tacked on to the loan may make the vacation cost more than you anticipated.

• Dealing with debt: Dealing with the debt long after the vacation is over may cause buyer's remorse over your loan.

• Debt-to-income ratio impact: It's possible a vacation loan could affect your ability to get loans for other major purchases like a car or mortgage, if you end up taking on more debt than you can repay.

Alternatives to Vacation Loans

You don't necessarily need to take out a loan to pay for your trip. There are other options that work better depending on your budget, timing and repayment plans.

Here's a comparison table showing the features of a personal loan, credit cards, buy now, pay later and savings.

Travel Provider Financing

Some companies often offer travel provider payment plans directly at checkout. It’s a version of the “buy now, pay later” concept.

It’s an installment plan that popular companies often provide. For example, Delta, United Airlines and American Airlines offer the option to pay over six, eight or 12 months. Cruises also provide a similar option. You can make a deposit and then pay the remaining debt over a period of time.

Credit Cards

There are two ways you can use a credit card to pay for your trip.

1. 0% Interest Credit Card

A 0% interest credit card makes sense when you want to spread the amount of the trip over a period of time without having to pay interest.

2. Credit Cards for Travel Rewards

Credit cards for travel rewards is best for those who can pay their credit cards in full and want to capitalize on perks. Perks may include lounge access and fraud protection.

Keep in mind these credit cards carry a high interest rate. Make sure you can pay these balances off so they don’t linger. Otherwise, your vacation can become substantially more expensive.

Buy Now, Pay Later

Buy now, pay later (BNPL) options allow you to complete a purchase without paying for the entire thing. Instead, you’ll buy the item— or service — before spreading your payments out over a few months.

You can now book flights and hotels, as well as pay for other expenses through this option. This can make it easier to afford the cost of your next vacation. Depending on the BNPL provider, there may be a credit check but eligibility requirements are usually flexible.

However, splitting payments can make trips feel more affordable initially, but the total cost still matters. Make sure that paying later isn’t a heavy lift later.

Line of Credit

Although a line of credit is a potential option for raising money for a trip, it's likely not the most ideal way to fund your next vacation. Here's how it works — You can borrow up to your credit limit and pay interest only on what you owe. If you can keep repaying the balance, you can use the line of credit as often as you need during the withdrawal period.

However, you're paying interest on a short-term experience, and you risk carrying a balance for a long period of time.

Keep in mind, also, that the interest rate is likely variable, so the trip will end up costing much more than the original purchase price.

Save Up for Your Trip

If you’re reluctant to take out a loan for your trip, there are practical ways to save for your next vacation.

You can set up a high-yield savings account that's dedicated to a vacation fund.

You can also automate small transfers from your paycheck to hit your savings account every pay period. If you “set it and forget it,” you can ease your way into saving for your vacation.

Planning Your Budget with Your Vacation Itinerary

Planning for your budget is a process and cannot be done overnight. Before you decide how to fund your vacation, think through the decision. Here's a checklist you may want to consider:

Monthly affordability: Can you comfortably afford payments monthly without dipping into your savings or emergency funds?

Total cost: What's the true total cost of your trip after including fees and interest?

Carrying the debt: Will you still be paying for the trip by the time you plan for the next vacation?

Alternative way: Is there a lower-cost way to pay for the trip? Could you potentially use a 0% APR credit card to pay for the trip? Could you set up a high-yield savings account and gradually save for the trip?

FAQs

Is a vacation loan just a personal loan?

A vacation loan is an unsecured personal loan. You receive a lump sum upfront and then pay it back in installments plus interest.

Is borrowing for a vacation a good idea?

It depends on your current financial picture. If you have a stable income and good credit score, it may be a good way to spread out your costs. If you’re already struggling with debt, it may not be a good idea to add another payment.

Is a personal loan cheaper than using a credit card for travel?

Generally, yes, a personal loan can be cheaper than a credit card for travel. However, some credit cards offer a 0% introductory rate, and if you pay the balance in full, using a credit card may be cheaper than a personal loan.