Wednesday , 17 August 2022

Vacation Loans: What You Should Know Before Getting One

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What’s your dream vacation? Getting a tan on a beach while on a tropical island? Visiting the Northern Lights in Iceland? Going on a penguin-watching expedition in Antarctica? Admiring the sunset in Santorini? Perhaps it could be taking the ultimate road trip with your friends and loved ones. Whatever your dream holiday is, it may not be as far as they seem.

Getting financially prepared is one of the significant challenges in achieving your dream vacation. Unfortunately, each of us has different financial status, so not everyone can easily save the money needed for the trip. However, vacation loans are there to help you to make your desired vacation a reality.

What are Vacation Loans?

Vacation loans are unsecured personal loans that you can use to pay for your travel. They can cover all the costs of your vacation, such as transportation, hotel accommodations, restaurant reservations, rental cars, tours, and other vacation-related expenses.

Typically, vacation loans are unsecured, meaning no property or asset is needed as collateral. However, it also means that there is a higher interest rate. In addition, these loans are paid through fixed monthly payments for a specified loan term.

How Does a Vacation Loan Work?

Many vacation loans function similarly to personal loans. Depending on the lender, loan amounts can start from $1,000 and go as far as $100,000. The loan term is usually between one (1) to seven (7) years. However, lenders may provide shorter or longer loan terms.

The interest rates of vacation loans can vary per lender, but it mainly depends on your income, creditworthiness, and other financial factors. The rates generally range from 5% to 36%, making vacation loans one of the common types of high interest loans.

The lowest rates are reserved for the most creditworthy candidates, while the highest rates for the least. As a result, vacation loans may have lower interest rates than credit cards but higher than secured loans.

Pros of Vacation Loans

Vacation loans are a possible way to make your dream holiday a reality without spending too much time while building up your savings. The following are additional upsides of getting vacation loans.

  • Fixed Monthly Payments
    • As a personal loan, vacation loans allow you to access the money when needed. In addition, it is an installment loan, meaning you will pay a fixed amount every month until the repayment period is over. You don’t need to pay your vacation expenses upfront. Instead, you’ll have to repay the loan with interest.
  • Relatively Lower Interest Rates
    • The interest rate of vacation loans depends upon your credit score and other financial features. So if you have a great score, lenders may let you borrow money at a lower interest rate. It could be relatively lower compared to credit cardholders who have to pay 15% interest for existing accounts and 18% interest for new offers.
  • Fund an Emergency Travel
    • Usually, when you travel, you have the opportunity to plan your financial expenses. However, you don’t get a chance to do so in case of an emergency. A vacation loan can make it happen and cover your travel expenses in the nick of time.
  • Provides Flexibility
    • While using a vacation loan, you can take advantage of the lowest travel prices, even if you don’t have cash on hand. However, make sure that the discounts you obtain at lower prices are more significant than the interest and fees you pay on your loan.

Cons of Vacation Loans

To understand vacation loans better, you should also know some of their drawbacks. It includes the following:

  • Interest Increases the Vacation Cost
    • You have to repay the principal amount you borrowed plus the interest. It can lead to making your dream vacation more expensive compared to paying it with cash.
  • Fees Increase the Borrowing Cost
    • Aside from paying the interest, some lenders charge additional fees on personal loans. These fees include origination fees as well as prepayment penalties. The added fees may also inflate the total price of borrowing.
  • Stress Due to the Monthly Payment
    • While going on a vacation, people’s primary purpose is to relax, get rid of the stress, and stay away from day-to-day worries. However, financing your trip using a vacation loan can lead to additional stress and anxiety. It’s because of the realities of loan repayment responsibilities.
  • Negatively Impact Credit Score
    • Applying for a vacation loan can negatively impact your credit score. Failing to make on-time payments with your loan can also lower your credit score. Any new loans can also affect your debt-to-income ratio, which limits your chance of getting other loans in the future.

The Bottom Line

Everyone needs a vacation now and then, but saving for one can be challenging. After reading everything, it should help you decide whether taking a loan for your dream vacation expenses is worthwhile or not. Take the time to do your research, and decide; what’s the next course of action that suits you the best.