Taking a Personal Loan for a Vacation: Is It a Good Idea?

Whether you’re taking a solo trip or traveling with loved ones, vacations often come with significant costs. A personal loan can be a useful tool for various travel expenses, offering the flexibility to cover everything from flights and hotels to local experiences.

But before taking out a personal loan for an unessential expense like a vacation, you need to assess your financial situation and your ability to repay the loan comfortably. Is a week away worth many extra years of monthly loan repayments? Do you expect to be able to repay the loan quickly to avoid paying interest?

We explore how vacation loans work, their advantages and disadvantages and how to apply for one if you decide it’s right for you. In general, there are usually more cost-effective options to funding vacation travel than a personal loan, most notably credit cards that have travel rewards.

Key Takeaways

A vacation loan could help fund rental vehicles, accommodation, tours, food, transportation and other trip-related costs.

Before taking out a personal loan for a vacation, consider using credit cards with travel rewards, a personal line of credit or your savings.

Some benefits of personal loans used for vacation expenses include low rates, lump-sum disbursement and predictable repayment terms.

What Are Vacation Loans?

A vacation loan is a type of personal loan specifically intended to cover the costs associated with vacation travel, such as airfare, accommodation and other trip-related expenses. It doesn't require collateral, relying on your creditworthiness instead for approval. This makes the application process straightforward but also means that your credit score significantly influences both approval and the terms of the loan.

Personal loans for vacation are available from banks, credit unions and online lenders. Their features vary by lender but typically include a range of repayment terms from several months to many years. Funds from a vacation loan, like with other personal loans, are often distributed directly into your bank account, and interest rates are usually fixed.

Taking out a vacation loan is a financial commitment that requires careful consideration of the terms and your ability to manage repayments. You need to decide if a short-term trip is worth the extra bill each month.

How Do Vacation Loans Work?

A vacation loan is the same as a personal loan — it’s just that the funds are applied only to vacation expenses. Like most personal loans, vacation loans include:

Interest rates

As of February 2024, the average interest rate on a 24-month personal loan is 12.49% based on Federal Reserve data. Your actual rate for a vacation loan may vary based on your credit score and the lender's policies. A higher credit score can secure lower interest rates, making the loan more affordable over time. If your credit score is low, you will face higher interest rates.

Loan Amount

The amount you can borrow with a personal loan for a vacation usually ranges from $1,000 to $100,000. This range allows you to take out as little or as much as you need to cover your travel expenses. The specific amount you are eligible to borrow will depend on your creditworthiness and the lender’s criteria.

Repayment Terms

Repayment terms for vacation loans can vary from 12 to 84 months. Longer repayment periods result in smaller monthly payments but increase the total interest paid over the life of the loan. Choosing the right term is a balance between affordable monthly payments and minimizing total interest costs.

Additional Fees

Vacation loans may come with additional fees such as origination fees, prepayment penalties or late payment fees. These can significantly affect the overall cost of your loan, so make sure to review the loan agreement carefully to understand all the extra charges before committing.

Application Process

Applying for a vacation loan involves checking your credit score, completing an application and providing some documentation of your income and debts. The process is generally straightforward and can often be completed online. However, some financial institutions may allow you to apply over-the-phone or by visiting a physical branch.

Release Funds

The funds from a vacation loan are usually deposited directly into your bank account. This process can be completed within a few business days, and in some cases, lenders may offer same-day funding if all requirements are met swiftly. Having immediate access to the money allows you to easily manage and pay for your travel-related expenses.

Pros and Cons of Vacation Loans

When considering funding your next vacation, vacation loans are worth adding to your comparison options. Before you pursue an application, weigh the pros and cons.

Pros	Cons
Immediate funding: Vacation loans provide quick access to funds, often within days of approval, which is ideal for last-minute travel plans.	High interest rates: Vacation loans may carry higher interest rates compared to other types of loans, particularly for those with less-than-stellar credit.
Fixed interest rates: Most vacation loans have fixed interest rates, ensuring that monthly payments remain consistent throughout the loan term.	Additional fees: These loans can include extra costs such as origination fees and penalties for late or early payments, increasing the overall expense.
No collateral: Since vacation loans are unsecured, they do not require any collateral, which simplifies the borrowing process.	Stringent requirements: Applicants may face stringent credit and income requirements to qualify for a vacation loan, which can be a barrier for some.
Flexible use of funds: The funds from a vacation loan can be used for a variety of travel expenses, offering considerable flexibility.	Longer repayment periods: Longer terms can mean smaller monthly payments, but they also lead to more interest paid over the life of the loan.
May improve credit score: Regular, on-time payments of a vacation loan can contribute to improving your credit score.	Debt burden: Taking on a vacation loan increases your overall debt, which impacts future borrowing capabilities.

How to Get a Vacation Loan

Understanding the steps to obtain a vacation loan can streamline the process, making it more straightforward and increasing your chances of a successful application.

1
Determine how much you need
Assess the total cost of your trip, including all travel-related expenses like airfare, accommodations, food and activities. This calculation ensures you borrow only the amount necessary, avoiding overspending. For example, if your trip budget totals $3,000, that's the amount you should aim for in your loan.
2
Find out if you qualify
Check your credit score and review your financial situation to determine if you meet the eligibility criteria set by lenders. Most lenders require a minimum credit score and evaluate your income and debt-to-income ratio. If your credit score is below the typical requirement of 600 to 650, consider improving it before applying.
3
Shop around for lenders
Explore banks, credit unions and online lenders to secure the best interest rates and loan terms for your vacation loan. Consider getting prequalified, which involves a soft credit check and allows you to compare loan offers without any commitment.
4
Submit your application
Once you've chosen a lender, complete the loan application process, which typically involves providing personal and financial details. You may need to submit documents like pay stubs, tax returns and identification. Ensure all information is accurate and complete to avoid delays in processing.
5
Wait for funds
After submitting your application, there is usually a brief waiting period while your application is reviewed. If approved, the funds will generally be deposited directly into your bank account. The time it takes to receive the funds can vary, but many lenders offer quick disbursements, sometimes even on the same day of loan approval.

When a Vacation Loan Make Sense

The decision to take out a vacation loan varies from person to person. While some may never consider borrowing money to fund a vacation, others might find it a good option if they can manage the monthly payments comfortably or if they expect to be able to pay the loan off quickly.

Here are some instances when taking out a vacation loan might make sense:

Unexpected travel needs: Sometimes, emergency situations require travel, such as needing to care for a sick relative or attend a funeral. If savings are not sufficient, a personal loan can provide a quick financial solution to meet these urgent travel needs.
Special occasions: For special events like honeymoons, milestone anniversaries or important family gatherings abroad, a vacation loan can provide the necessary funds to ensure you don't miss these significant moments.
Once-in-a-lifetime trips: For trips that offer a unique, potentially unrepeatable experience — like seeing the northern lights, exploring remote parts of the world or attending a major global event — a vacation loan can help make such dreams a reality.
Earning potential through travel: In cases where traveling could lead to potential income opportunities — such as networking events, workshops or conferences related to your career — a vacation loan could be seen as an investment in your professional growth.
Well-planned budgeting: If you have a solid repayment plan and a stable income, taking a vacation loan can be manageable. This is applicable if the monthly payments can be comfortably integrated into your budget without compromising your financial health.

When a Vacation Loan Doesn't Make Sense

Taking out a personal loan to finance a vacation can be tempting, especially if you're dreaming of a trip you can't afford right now. But sometimes it’s just not the best choice — you need to have a clear understanding of your debts and ability to repay.

Debt-to-Income Ratio and Affordability

Your debt-to-income ratio (DTI) is a key indicator of your financial health. It represents the percentage of your monthly income that goes towards debt payments. To calculate your DTI:

Add up all your monthly debt payments: This includes credit cards, student loans, car loans and any other recurring debt obligations.
Divide the total monthly debt payments by your gross monthly income: Gross income refers to your income before taxes and deductions.

If your monthly debt payments total $1,000, and your gross monthly income is $4,000, your DTI is 25% ($1,000 / $4,000 = 0.25). A general rule of thumb is that a DTI of 36% or lower is considered healthy. If your DTI is higher, it may mean that you have too much debt.

TAKING OUT A LOAN FOR A VACATION IS NOT RECOMMENDED IF:

You have a high DTI.
You have other financial priorities.
You're not sure you can afford the repayments in the short or long-term.

Alternatives to Vacation Loans

While taking out a vacation loan may seem like a convenient way to finance a getaway, there are several other ways to fund your trip that might better suit your financial situation. These include:

Savings

Building a travel fund over time is a risk-free way to pay for a vacation. Set aside a fixed amount monthly into a dedicated savings account specifically for travel expenses.

Credit cards with travel rewards

Using credit cards that offer travel rewards can help reduce travel costs through points and miles that can be redeemed for airfare, hotels and other travel-related expenses. Ensure you pay off balances promptly to avoid interest charges.

Personal lines of credit

A personal line of credit offers flexible borrowing options where you draw only the amount you need and pay interest only on that amount. This can be particularly advantageous if your travel costs vary or you encounter unexpected expenses.

FAQ: Vacation Loans

Vacations offer relaxation and can improve your mental health. But taking out a loan to travel today means another monthly bill once you’re back into your routine. Is that something you’re comfortable with?

We answer some commonly asked questions about vacation loans to help you determine if it makes sense for you.

How much do I need to spend on a vacation?

The cost of a vacation can vary widely based on destination, duration and the type of experiences you seek. To determine how much you need to spend, consider your travel style, accommodation preferences and any planned activities. Setting a budget before planning your trip can help manage expenses effectively and avoid overspending.

Can I get a vacation loan with bad credit?

It is possible to secure a vacation loan with bad credit, but you should expect higher interest rates and less favorable terms. Some lenders specialize in loans for those with less-than-perfect credit, but check the terms carefully before applying to avoid exacerbating financial strain.

What should I consider before applying for a vacation loan?

Evaluate your financial situation and consider whether you can comfortably afford the monthly payments. Also, think about the total cost of the loan, including interest and fees, compared to saving ahead for travel expenses.

Can I pay off a vacation loan early?

Many lenders allow you to pay off your loan early without any penalties, but some might charge a prepayment fee. Check the terms of your loan agreement to understand any potential penalties for early repayment.

What happens if I can't repay my vacation loan?

Failing to repay a vacation loan can lead to serious financial consequences, including damaged credit scores and increased debt due to late fees and higher interest rates. Contact your lender as soon as possible if you anticipate difficulty with repayment.

What are the risks of taking a vacation loan?

The main risks include the potential for high interest and fees, especially if your credit is not excellent. Additionally, taking on debt for non-essential expenses like vacations can lead to financial strain if not managed properly.

About Zachary Romeo, CBCA

Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.

Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.

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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

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