Life can be expensive. From houses to cars, to post-secondary education, certain expenses in life can be far beyond our financial reach. That’s why there are loans to help make such purchases a reality.
But one such expense that you might not necessarily associate with taking out a loan for is a vacation. While it’s not typically recommended to take out a loan to finance a vacation, once in a while might be fine, as long as you’re in a strong financial position and are comfortable with adding more debt to the books.
And 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. And if there’s not enough money in the pot, a vacation or travel loan might be able to help.
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What Are Vacation and Travel Loans?
Basically, vacation and travel loans combine savings and credit cards with loans. If your savings are not built up enough and you don’t want to max out your credit card, a vacation loan can top up your funds to cover the cost of a holiday.
Furthermore, if you’re only required to pay a deposit right away and not cover the full cost of your trip, a vacation loan can provide you with additional time to come up with the rest of the money to pay off the trip in full.
Do you know what the true cost of borrowing is? Find out here.
Potential Issues With Borrowing For Travel
It goes without saying that taking out a loan – for whatever reason – comes with some risk. 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.
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, such as the following:
Adding 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.
Check out this article to learn how to conquer your high interest debt.
Choosing the wrong loan type – There are different types of loans available for consumers to apply for, each of which comes with its own set of pros and cons. Plus, each loan type may be better suited for some and not for others. As such, it’s important to understand what loans are available to you and choose the one that’s best.
If not, you could wind up with a loan that may be tedious to have to manage. Not only that, but you could get stuck with a higher interest rate compared to another loan from a different lender, making you pay more than you have to.
Taking on 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.
Failing to read your loan contract – As with every loan, there are various terms that come with them. If you don’t review your loan contract, you’ll miss some pertinent information about your loan, including what the interest rate is when payments are due, and the date that the entire loan needs to be paid off in full. Failing to adhere to these terms could land you in hot water with your lender.
Maxing out your 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.
Credit card debt comes with a high interest rate and rigid fees. If you borrow too much, you could damage your credit utilization ratio and pay a ton of money in fees and interest.
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.
How to Borrow For Travel The Right Way
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 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 (click here to learn how to budget for vacation). 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.
If you’re going to borrow money to go on a vacation, it’s important to select the right loan products based on your financial situation so you don’t wind up with a product that is unsuitable for your financial situation.
Compare Credit Cards and Personal Loans
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.
Instead, 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, repayment schedules, and monthly payments, making budgeting much easier.
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.
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.
Consider Making Your Vacation More Affordable
In order to reduce the amount you have to borrow or 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 Loan?
If you need to cover the cost of an unexpected trip or an upcoming vacation, let Loans Canada help. Submit and application today we’ll put you in touch with the right lender who has the loan products you need to finance your travel.