A loan may seem like your ticket to a dream vacation when you lack the cash to cover the hefty price tag upfront. A vacation loan is simply another name for a personal loan you use for travel.
But looks can be deceiving.
That vacation loan you use to finance your seven-day trip could leave you shackled to debt for years and affect your ability to obtain credit when you need it.
Before you take out a travel loan, read the fine print. What appears to be a good deal may not be once you look closer at fees and interest rates.
Reasons to Say No to a vacation loan
Discretionary spending isn't a good reason to borrow money
We'll start with the biggest vacation loan problem: Buying gifts, traveling, and any other vacation expenses you incur are discretionary expenses. When you take out a vacation loan, you're paying interest for things you want, but don't need.
Even if you have excellent credit and qualify for the best personal loan rates, you'll still go into unnecessary debt. You're putting your future self in a more difficult financial situation so you can have what you want right away instead of saving for it.
You could go over budget and borrow more
Let's say you get a vacation loan for an amount you think will cover all your expenses. What if those expenses end up being much more than you bargained for?
Depending on the situation, you may be able to rein in your spending. If you took out a loan to buy gifts, you could look for more economical options. But what if you borrowed money for a vacation trip and you realize halfway through the trip that it's going to cost more than you thought?
You could find yourself borrowing more for those unexpected vacation costs, putting you even deeper in debt.
It makes your holidays more stressful
The whole point of a vacation loan is to enjoy your holidays, but that's hard to do when you're worrying about how you'll pay back what you borrowed and what your bank account will look like after the fact.
If you think you'll be able to push these thoughts out of your head while you celebrate, the odds aren't in your favor. Among people in debt, over half think about their debts at least several times per week and over a quarter think about them every day.
Loan payments make it difficult to save money
When you don't have much money saved, building your savings should be your No. 1 goal. You'll be better prepared for emergencies and future expenses that way.
The more bills you need to pay each month, the harder it is to save. If you get a vacation loan, those loan payments will hold you back from saving money.
It could become a bad habit
I've mentioned why borrowing money for discretionary expenses isn't a good idea. Another reason why you should avoid this is that it often turns into a habit. Once you've borrowed money for something you don't need, it gets easier to do it again.
Here's an example of exactly how this could happen with a vacation loan. You decide to get a 12-month vacation loan this year. Because of your loan payments, you can't save much. By month 11, you need money for the holidays all over again.
At best, you're back to square one -- it's the vacation season and you're short on cash. That's assuming you took out a 12-month vacation loan. If you got a loan with a longer-term and only made minimum payments, you're in an even worse position.
Vacation Loan Alternatives
The risks that come with vacation loans aren’t worth the financial consequences. There are other strategies you can use to put money aside, take that dream vacation, and avoid taking out a personal vacation loan, including:
- Cutting back on expenses. If you know you want to take a vacation next year, start planning ahead and looking at your expenses. Ask yourself: Is there anything that I am spending money on that I don’t need? If and when you find areas where you can cut back on your spending, set that extra money aside in a savings account to help fund your vacation.
- Automating your savings. Saving for any type of expense or investment is much easier when you use an automated system - SIP'S. Plan your budget and start your SIP today!
- Creating a travel budget. Setting extra money aside is one way to set yourself up for success. Creating a travel budget is another. If you don’t know how much your vacation will cost, how will you know how much you need to save? Examine the costs of transportation, accommodation, tourist attractions, and restaurants to give yourself a good idea of how much money you should tuck away.
- Utilizing credit card rewards. Credit cards are a handy way to earn rewards on the money you already plan on spending. By opening an airline credit card you can earn a bonus worth a free flight or two. Keeping your eyes peeled for cheap flights. There’s a method to the madness when it comes to snagging a solid deal on flights. While it can feel like luck of the draw, if you know where to look, you can score big. Using a resource to find cheap flights, is an easy way to track down a ticket that can lessen the dent in your wallet.
Wealth Cafe advice:
The best way to enjoy a vacation is to always plan well in advance. When your finances are built up, it would be the right time to embark on the trip. The idea of buying now and paying later could be an appealing alternative but there is no point to make your holidays costlier than necessary as it leads to financial stress later on. In the end, it is much of a personal choice in determining how much the vacation is worth to you. A few days of joy that lead to a loan hanging around your neck for the next few years may not be the best idea.
Loans should always be for necessities, assets, and emergencies. If it's for luxury, one may be living beyond their means.
To learn more about saving and investing enroll in our course: NM 101- Maximise your Savings