With life being as stressful and busy as it can be, taking a vacation from time to time offers a much-needed break from the hustle and bustle. It’s not recommended to finance a vacation, but once in a while might be fine. As long as you’re in a strong financial position. Here’s everything you need to know about your travel financing options.
The Travel Financing Options You’ve Been Looking For
If you need some financial assistance for travel costs, there are a few travel financing options. Here are some options:
Personal Loans For Travel
A personal vacation loan comes with an upfront lump sum of money that you can use to cover the cost of your vacation. These loans are usually unsecured, which means there is no asset of value that’s used to collateralize a loan.
You’ll then be required to repay that loan amount, along with applicable interest. Payments are made in fixed installments over a certain loan term. The interest rate you are charged will depend on your creditworthiness, income, and asset/debt profile.
Personal Loans For Travelling Pros
- Fixed payments. Since the installment payments are fixed, they won’t change throughout the loan term. These predictable loan payments make it easier to budget.
- Low interest. The interest rate that you’ll pay on a personal loan is typically lower compared to credit card rates. However, you’ll generally require a good credit score to secure a low rate.
- Unsecured. There’s no need to have a valuable asset to secure a personal vacation loan. That said, unsecured loans tend to come with higher interest rates compared to secured loans. This is because of the higher level of risk that the lender is assuming.
Personal Loans For Travelling Cons
- Added debt. When you take out a personal vacation loan, you’re adding more debt to your pile. You’ll need to decide whether going further into debt for a holiday is worth it.
- Fees. Besides interest, there are fees that come with a personal vacation loan. This can increase the overall cost of the loan. These fees can include admin fees, loan origination fees or early prepayment penalty fees.
Funding Your Vacation With A Home Equity Line Of Credit (HELOC)
A home equity line of credit (HELOC) is a type of financing arrangement in which you borrow against the equity in your home. As long as you have at least 20% equity — which is the current value of your home, minus what you still owe on your home loan — you may be able to qualify.
Unlike a traditional loan, a HELOC allows you to withdraw from a credit account up to a specified limit. You can borrow as much or as little as you like from that account, and you’re only required to pay interest on the portion withdrawn. Only when the draw period ends will you have to start repaying your principal.
Once you repay the amount borrowed, you’re free to borrow again and again as the need arises.
Pros Of Using A HELOC For Vacation
- Only pay interest. Instead of paying interest on the entire credit amount, you only pay interest on the funds you withdraw. Once you pay that money back, you’ll no longer have to pay any more interest until the next time you draw from the account.
- Low interest rates. Since HELOCs are backed by your home, they’re less of a risk for your lender. In turn, the interest rates charged are usually less than an unsecured loan.
- Fast access. If you’ve already been approved for a HELOC, you can borrow against your home’s equity over and over. Rather than having to re-apply for a loan whenever you need extra funds, your HELOC will always be available to you, providing you with fast access to cash when you need it.
Cons Of Using A HELOC For Vacation
- Secured. Your home is secured against your HELOC. As such, your home is at risk of being repossessed by the lender if you ever default on your payments. Be sure that you’re financially capable and responsible to handle a HELOC before applying for one, as you could risk losing your home if you fail to keep up with your payments.
Cover Your Travel Costs With A Credit Card
If you have a credit card in your wallet, you may consider putting the vacation expense on your tab and paying for it in full before your next credit card payment due date. But before you do, consider the pros and cons of putting this big expense on credit.
Pros Of Using Your Credit Card For Travel
- Introductory period. Some credit cards offer 0% APR introductory periods as an incentive to get consumers to apply. During these introductory periods, you’ll pay no interest on any balance you hold, which is an attractive feature for those currently holding high credit card balances. If you plan it right, you can charge your vacation to a new credit card that offers this 0% payment period and avoid interest, as long as you pay off the balance before the introductory period ends.
- Earn points. Many credit cards are designed for travel and offer some sort of reward system that allows you to earn points with every purchase you make. Once you’ve collected enough points, you can redeem them for free goods and services.
Cons Of Using Your Credit Card For Travel
- High interest. Credit cards are notorious for high interest rates that can inch over the 20% mark. If you carry your balance month after month, you might find yourself paying more money towards interest than the original balance itself.
- Late payments. If you are late making your credit card payments, your credit score will suffer.
How To Apply For A Travel Loan
Here are 5 steps to help you get the financing you need to travel.
Step 1: Check Your Credit Score
Knowing your credit score will give you a good idea of your chances of getting approved for a travel loan and the type of interest rate you may be able to secure. A higher score will increase your chances of loan approval and securing a lower rate, which will help save you money over the life of the loan. Generally speaking, a credit score of at least 720 will boost your odds of getting access to the best rates. If your score is less than 650, you might want to take some time to improve your score first before applying for a loan.
Step 2: Compare Lenders
Shopping around with different lenders will allow you to compare their rates and fees before applying for a loan. You can easily compare lenders by using an online aggregator that will automatically populate lenders that meet your criteria.
Step 3: Get A Loan Quote
Before applying for a travel loan, get a loan quote to get a better idea of the type of interest rate and loan offer you can get. When you formally apply for a loan, the lender will pull your credit report, which is known as a “hard inquiry” and it will impact your credit score. But with a loan quote, only a “soft inquiry” is necessary, which won’t have any impact on your credit score.
Step 4: Complete The Application
After finding the right lender, you can apply for a loan by providing the necessary travel loan documents and completing the application form. Your lender will then assess the information you’ve provided before approving your loan application.
Step 5: Get Funded
Once approved for your loan, you’ll receive the loan amount within a couple of hours to a few days depending on the lender. From then on, you’ll be required to make regular payments until the loan term ends and the funds are fully repaid.
Travel Financing: Things To Consider
It goes without saying that taking out a loan – for whatever reason – comes with some risk. It’s always wise to be prudent before taking out a loan, including for a vacation. To make sure you’re well-informed before applying for a vacation or travel loan, get familiar with all the potential issues that may come with this type of borrowing.
- Impact On Credit – If you’re ever unable to make a payment against your loan after you’ve taken one out, your credit score could suffer. And if you completely default on the loan, the consequences can be even more serious.
- Adds To Your Financial Debt – If you already have a pile of debt, adding another loan to the mix will just compound the issue. Furthermore, if you’re already having a tough time managing your current debt, taking out another loan could cause future financial issues for you.
- High Monthly Payments – If you’re not careful, the monthly payments associated with your travel loan can be more expensive than you might be able to comfortably afford. Make sure you’ve budgeted for these additional payments first.
- Maxed Out Credit Cards – If you choose to use your credit cards to fund your vacation and max them out to pay for your expenditures, you could hurt your credit score. Maxing out your credit cards skyrockets your utilization, which can do damage to your credit. Further, spending too much on your credit cards can translate into sky-high fees and interest, making your debt load even more difficult to pay down.
Tips On Travel Financing
Taking out a loan to go on vacation is not really recommended. Travelling is considered a luxury and not a necessity, and such, it’s not really something worth getting into more debt over. That said, there is a right way and a wrong way to borrow for this purpose. Here are some tips to help you borrow appropriately:
- Use Your Credit Card Rewards – If you have a credit card that collects points, you may be able to put the points toward vacation. At the very least, these points may be able to cover part of the expense of your trip.
- Set A Budget – The price of hotel stays and flights vary drastically. Be sure to come up with a budget and choose airfare and accommodations that fit within what you can comfortably afford. And don’t forget to factor in miscellaneous items such as food, entertainment, cab rides, and shopping. Don’t borrow any more than what’s required.
- Choose The Right Loan Product – There are few different loan options you may want to look into, including an unsecured personal loan, a line of credit, or a secured home equity line of credit (HELOC). Make sure you understand all the ins and outs of each loan type before you take one out.
- Watch Out For Travel Loan Scams – While most lenders are legitimate, there are predatory lenders out there who are waiting to pounce on the next unsuspecting consumer. It’s crucial to be diligent about who you deal with, as there are scammers everywhere. Basically, any lender that guarantees approval without looking at your financials and requires upfront fees and insurance payments should be avoided.
Travel Financing: Should You Use Your Credit Card Or A Personal Loan?
Regardless of which option you choose, it’s important to make sure that you weigh all your options and compare the terms of each before making your final decision on how to finance your travels.
Is A Credit Card A Good Option For Travel Financing?
It’s common for consumers to rack up their credit cards in order to purchase things that they don’t have enough money in their bank accounts to afford, and vacations may be one of them. But with sky-high interest rates that typically come with credit cards, they don’t make much financial sense.
That said, certain credit cards offer travel insurance for the duration of your trip if you pay for your holiday with the card. In case you need to cancel your flight or suffer a medical emergency while abroad, you might have cancellation or medical insurance to cover you. Plus, you may be able to collect points and even use rewards points to pay for part of your trip, as already mentioned.
Is A Personal Loan A Good Option For Travel Financing?
On the other hand, a personal loan might be a better option if you can get a rate that’s much lower than what your credit card issuer offers. In fact, personal loans are probably the second most common form of travel financing after credit cards. Personal loans offer fixed interest rates, flexible repayment schedules, and affordable payments, making budgeting much easier.
How To Reduce Travel Financing Costs?
In order to help you pay for your vacation without having to take out a loan, consider making your trip more affordable. Here are some ways to do just that:
- Check out online promotions
- Sign up for deal alerts
- Consider multiple stop flights to bring down the price
- Travel during off-peak times
- Set up a crowdfunding campaign for your birthday or Christmas present
- Deposit money into a high-interest savings account
- Establish a budget
- Use a rewards credit card
Looking For The Right Travel Financing Option?
If you need to cover the cost of an unexpected trip or an upcoming vacation, let Loans Canada help. Submit an application today we’ll put you in touch with the right lender who has the loan products you need to finance your travel.
