Most people need some well-deserved time away from the normal work or life grind at least once a year. Whether you like to go solo, with friends, a significant other, or family, simply thinking about a vacation can feel relaxing. However, planning can be stressful, especially when it comes to figuring out the dollars and cents.
Adding up the costs for airfare, hotel stays, food, and activities for yourself and others can add up fast. This can feel overwhelming when you have little to no money saved for the next big out-of-town adventure. If you’re low on cash but need time away, here are a few tips for financing your next vacation.
1. Obtain a Personal Loan to Pay for Your Vacation
A personal vacation loan can be a viable option for financing an expensive getaway. Credit unions, banks, and online lenders offer the best personal loans for vacations, with few restrictions on how you use the funds. You can use the money borrowed to pay for travel expenses, lodging, food, entertainment, and other related activities.
Most lenders let you take out a personal loan for vacation up to $50,000 at a lower interest rate than a credit card, depending on your income, debt, and credit situation. However, you can expect to pay an origination fee of 0-12% of the loan amount to cover the cost of originating it. Borrowers with fair to bad credit usually pay a higher annual percentage rate (APR) and origination fee than those with good to excellent credit.
A personal installment loan does not require a down payment or collateral, and repayment can typically be extended for two to seven years, depending on the lender, the amount financed, your debt, and needs.
2. Finance Your Vacation Using Credit Cards
You can also use credit cards to finance a vacation. This strategy is especially valuable when you use a travel credit card that rewards you with points, miles, or cash back.
It’s even better when you can take advantage of 0% APR for twelve months or more through a balance transfer promotion or by applying for a new credit card with an introductory period. However, transferring the balance to an existing card often comes with a small fee of 3 to 5% of the amount transferred.
Most travel credit cards reward you for regular purchases and offer higher rewards for travel-related purchases. Travel purchases often earn double, triple, or more than the standard reward rate.
When using a travel credit card to pay for vacation, you may have the opportunity to take advantage of additional perks as well, such as rental car insurance, no foreign transaction fees, complimentary food and drinks, hotel room upgrades, free checked bags, lost baggage insurance, reimbursement for canceled flights, upgrades to first class, premium airport lounges, and more.
Another benefit of paying for a vacation with a credit card is the flexibility to repay the new balance over as much or as little time as needed, in an amount that fits your monthly budget. However, you must pay at least the minimum amount due every month, generally 2% of your entire credit card balance.
One major downside to paying for a vacation with a credit card is that the average annual percentage rate is currently more than 20% in the U.S., so a personal loan may offer a more affordable financing option. This is especially true if you can’t take advantage of a promotional credit card offer or prefer to pay the money back over several years.
3. Utilize a Vacation Payment Plan for Traveling
In recent years, travel layaway payment plans, also known as point-of-sale loans or ‘book now, pay later,’ have grown in popularity, given the desire of more people to start paying in advance rather than trying to save for vacation. This is especially true for people living on a tight budget.
Individuals and couples using a vacation payment plan can book their trip months in advance and pay the balance over time. While there will likely be a fee for spreading out payments for the vacation package, interest rates can be as low as 0% APR and don’t always require a credit check.
On the downside, vacation payment plans may only cover some accommodations and activities, leaving you to pay the full cost of airfare and other items upfront. However, that will depend on the channel you use to secure the plan. You can also use multiple buy-now, pay-later channels to cover more of your vacation’s total costs if needed.
A local independent travel agent, your favorite vacation provider (like a cruise line, airline, or resort), and some online providers may offer travel payment plans.
4. Use Home Equity to Pay for Your Vacation
If you own real estate outright or are financing a home and owe significantly less than your property is worth, you can also consider utilizing a home equity line of credit or home equity loan to pay for a vacation.
Home Equity Line of Credit (HELOC)
If you have an existing HELOC open and can still withdraw money from it, that’s one of your better options for borrowing for a vacation. The interest rate will likely be lower than what you will get with a credit card or personal loan; you won’t have to pay additional fees to access the funds, and you’ll be free to use the money however you want.
If you have a decent credit history and score, you can also establish a new home equity line of credit, but you may have to pay closing costs and an annual fee. That can still be significantly lower than the interest you’ll pay on a credit card or loan, depending on how long it takes you to repay. Some lenders allow you to open a HELOC with little to no fees and offer repayment terms that span many years.
With a home equity line of credit, you pay interest only on the money you withdraw, not the total line available. HELOCs are typically variable-rate financial products you can use like a credit card during the draw period. Draw periods usually last 10 years or more, and you can reuse the available funds repeatedly until that period ends.
Home Equity Loan (HELOAN)
A home equity loan is like a personal loan, except you use your home as collateral. Once approved, you receive the full loan amount and repay it in fixed monthly installments. Credit requirements can be less stringent, and the interest rate will likely be lower than what personal loan lenders offer because the risk of them getting their money back is lower.
Home equity loans can also cover almost any expense, and repayment can typically be stretched out for five, ten, fifteen, twenty, and even thirty years. However, most lenders require a minimum home equity loan amount of $10,000 or more.
HELOAN lenders may require an origination fee and other closing costs, which you can pay up front or roll into the loan. These fees can add up to roughly 2-5% of the total loan amount. Lenders review your credit score and ability to repay to determine your loan terms, including the interest rate you receive and the fees you pay. A lower credit score often leads to a higher borrowing cost.
Both a home equity loan and a home equity line of credit will take longer to receive than a credit card or personal loan. Sometimes they can take as long as a couple of months to close, but a home equity line of credit is often faster.
5. Save Money for Your Vacation
Probably the best way to pay for a vacation is to finance it yourself by setting aside money for the trip. However, that’s not always possible, and sometimes you need to get away quickly. If you do have time to save for a vacation, that will be the least expensive way to travel.
Setting aside a portion of your paycheck each pay period and putting it into an account that isn’t easily accessible, like an online high-yield savings account or short-term certificate of deposit, is a simple way to have cash on hand when vacation time rolls around.
Technology-based savings apps can link to your checking and savings accounts, paycheck, or other sources, and can help you reach your travel goals early.
Creating a vacation fund and saving ahead of time is our top way to prepare for your next vacation. If you have a rewards credit card, you can still use it to get the points and take advantage of other benefits, then use your savings to pay off the balance before interest accrues.
Final Thoughts on Financing a Vacation
Before choosing a vacation financing option, understand the total cost and your budget to decide whether you need an extended repayment plan. Then you will be prepared to explore how to finance the vacation entirely and make a smart choice.
Both unsecured personal loans and credit cards offer convenience that is hard to beat when financing a vacation without much planning. A home equity line of credit or home equity loan can also be a valuable borrowing tool for homeowners with good credit.
Travel payment plans through travel agents, resorts, or other companies offer an alternative way to finance a vacation upfront and over time, rather than with a large one-time payment or a lengthy loan.
But if you can swing it, saving and paying for a vacation with your own money is the best option. Even better if you pay with a credit card to earn points and pay the balance off before interest accrues.
I hope you found this article discussing the “best ways to finance a vacation” helpful. If you have a question, personal tip, or another comment, please don’t hesitate to message me through the contact form. Happy vacationing!