Personal loan

Should you use a personal loan to finance your summer vacation?

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A personal loan can be a good option for paying for a vacation, especially compared to credit cards. (Shutterstock)

Vacations can be expensive, and with rising airfares and gas prices, they are only getting more expensive. But if you decide a little rest and relaxation is worth it, you have options to help you pay for it all. A common way is a personal loan, sometimes called a vacation loan when you use it to finance your trip.

Here’s how a holiday loan works and whether taking out such a personal loan is a good idea.

If you’re considering a personal loan to finance your vacation, visit Credible for view your prequalified personal loan rates from various lenders, all in one place.

What is a vacation loan?

A vacation loan is a type of unsecured personal loan. You borrow a lump sum of money up front and repay it in a series of monthly installments over a set period of time, usually two to five years.

Personal loans usually have a fixed interest rate, which means your payment will not change as long as you have the loan. They’re usually unsecured, so you don’t risk losing your home or other assets if you fail to make your payments. However, missing payments can have a devastating effect on your credit score, making it harder to borrow in the future.

Many personal loan companies will include the term “holiday loan” in their marketing. These loans are generally no different from a standard personal loan. You will only use the funds to pay for vacation expenses.

Is holiday credit a good idea?

Whether a vacation loan is a good idea depends on your unique financial situation.

Vacation loans have several advantages over other options you may be considering to pay for your trip. For example, personal loans generally have much lower interest rates than credit cards. If your vacation expenses exceed what you can comfortably repay in one billing cycle, charging them to a credit card may end up costing you more in the long run than what you would pay with a personal loan.

As an unsecured loan, a personal loan is also much less risky than paying for a vacation with a home equity loan or home equity line of credit. Both of these loans are secured by your property, which means you could lose them if you are unable to make your payments.

If you have good credit and enough room in your budget for another payment, a personal loan can be a good way to pay for your summer vacation. If you have poor credit or your finances are already depleted, you may want to consider another option for getting away or spending time improve your personal loan application.

But first polish your finances

Before applying for a personal loan, take stock of your credit and finances. Personal lenders set interest rates based primarily on the credit score. People with higher scores will pay lower rates, while people with poor credit may face higher interest rates and fewer loan options.

Lenders may also look at the amount of debt you already have outstanding. If you have relatively little debt compared to your income, you may be offered better terms for your personal loan. Large debt can make it more difficult get a personal loan. You should also factor a future loan payment into your monthly budget and make sure it matches comfortably before applying for a loan.

Credible, it’s easy to compare personal loan rates from various lenders, and it will not affect your credit score.

Advantages and disadvantages of the holiday loan

Before applying for a holiday loan, it is important to consider the pros and cons:


  • You can find lower interest rates. Vacation loans have significantly lower interest rates than other ways you might choose to pay for your trip, such as credit cards.
  • You can get money quickly. When you apply for a personal loan, you can get a decision in minutes and the money can be in your bank account the next business day.
  • You may be able to repay the loan early. In most cases, you can pay extra for your personal loan and prepay it. Before doing so, check your personal loan agreement to make sure the lender won’t charge a prepayment penalty. The best personal loans do not have prepayment penalty charges.

The inconvenients

  • You will have another monthly payment. A vacation loan is a form of debt much like a car loan or a student loan. You will have a fixed payment that you must make each month, so make sure you can afford it before taking out a loan.
  • Rates depend on your credit score. The interest rate you receive will depend heavily on your credit score, and the range offered can be wide. If you have poor credit, you may have a high interest rate, which means you’ll be paying thousands of dollars more for your vacation than you otherwise would.
  • Non-payment can hurt your credit. If you are in default on your personal loan, the lender can report it to the credit bureaus. This can seriously hurt your credit score and make it harder to borrow money again in the future.

How to pay for your holidays without taking out credit

Ideally, you wouldn’t need to take out a loan to pay for your vacation. Paying cash is always the cheapest way to meet a large expense. You can even have a more relaxing time on your vacation knowing you won’t be paying for it for the next few years. Here are some tips to help you pay for your vacation without taking out a loan:

1. Set a budget. It can be difficult to achieve a financial goal like saving for a vacation without knowing exactly where your money is currently going. Take stock of your income as well as your regular expenses, such as your rent or mortgage, utilities, and other debt payments. Also track how much you typically spend on groceries, entertainment, and other expenses. This will show you how much money you can save each month and give you ideas on where you can cut spending, if needed.

2. Examine your emergency fund. Typically, you want three to six months’ worth of your regular expenses set aside for emergencies. Your budget will help you determine how much you will need. This emergency fund can help you deal with unexpected expenses, like a car repair or a medical bill. Before you start saving for a vacation, make sure your emergency fund is in good shape.

3. Open a dedicated bank account. It may be easier to know how close you are to your savings goal if you open a new savings account or create a sub-account in your existing savings account to hold your vacation savings. You can set aside a certain amount of money each month to put into your vacation account, or you can put windfall income into it to help you reach your goal.

4. Shop around for bargains. If you can be flexible with your travel arrangements, you may be able to find cheaper flights or more affordable hotel stays for your budget. Use a site like Kayak or Expedia to help you find cheaper airfare, or sign up for a service like Scott’s Cheap Flights to help you find particularly good deals.