Taking some well-deserved time away from the normal work or life grind is necessary for most people at least once each year. Whether solo, with a friend, significant other, or family, simply thinking about a vacation can be relaxing. However, it can also be stressful to plan, especially when it comes down to figuring out the dollars and cents.
Adding up the costs for airfare, hotel stays, food, and activities for yourself and others can lead to a huge number. This can be overwhelming when you have little to no money saved for the next big adventure out of town. If you’re light on cash but desperately need an excursion, here are a few tips for financing a vacation.
1. Obtain a Personal Loan to Pay for Vacation
A personal vacation loan can be a viable option for financing an inexpensive or expensive getaway. Credit unions, banks, and online lenders offer the best personal loans for a vacation to borrowers without imposing many restrictions on how the funds must be used. You can use the money borrowed to pay for travel expenses, lodging, food, entertainment, and other related activities.
Most lenders allow you to obtain a personal loan for vacation for up to $50,000 at a lower interest rate than a credit card, depending on your current 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.
Taking out 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 your needs.
2. Finance a Vacation Using Credit Cards
Credit cards may also be used to finance a vacation. This strategy is particularly valuable when you utilize a travel credit card that rewards you with points, miles, or cash back for using the card. It’s even better when you can take advantage of a 0% APR for twelve months or more by utilizing a balance transfer promotion or applying for a new credit card with an introductory period.
Most travel credit cards will reward you for all your regular purchases and provide higher rewards for travel-related purchases. Oftentimes, travel purchases will be rewarded at double, triple, or many times 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 to paying for 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%, so a personal loan may offer a more affordable method to finance your next vacation. Especially if you can’t take advantage of a promotional offer or prefer to pay it back over several years.
3. Utilize a Vacation Payment Plan
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 a vacation. Especially people living on a tight budget.
Individuals and couples utilizing a vacation payment plan can book their trip many months in advance and pay the balance due 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 negative side, vacation payment plans may only include some accommodations and activities, leaving you to pick up 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 utilize multiple book-now, pay-later channels to include more components of your vacation’s total costs if needed.
Travel payment plans might be offered by your local independent travel agent, directly through your favorite vacation provider like a cruise line, airline, or resort, and through some online providers.
4. Use Home Equity to Pay for Vacation
If you own real estate outright or are currently financing a home and owe significantly less to the lender than what your property is worth, you can consider taking out a new home equity line of credit or a 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 going to be one of your better options for borrowing money for 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 retrieve the funds, and you’ll have the freedom 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 you take to pay it back. Some lenders allow you to open a HELOC with little to no fees and allow you to pay it back over many years.
With a home equity line of credit, you only pay interest on the money withdrawn and not the total line available to you. HELOCs are typically variable interest rate financial products that can be used like a credit card during the draw period. Draw periods usually last for 10 years or more, and you can reuse the available funds repeatedly until that period has passed.
Home Equity Loan (HEL)
A home equity loan is like a personal loan, except you use your home as collateral to acquire it. Once approved, you will receive the full amount of the loan to be repaid in fixed monthly installments over time. The credit requirements can be less stringent, and the interest rate will likely be lower than what is offered by personal loan lenders because the risk of them getting their money back is lower.
Home equity loans may also be used for almost any expense you want, 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.
HEL lenders may require an origination fee and other closing costs that can be paid upfront or worked into the loan. Those fees can add up to roughly 2-5% of the total loan amount. Your credit score and ability to repay the loan are reviewed to determine your loan terms, such as how much the lender will charge and the interest rate you receive. A lower credit score often leads to a higher cost of borrowing.
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 much a couple of months to close, with a home equity line of credit often being quicker of the two.
5. Save Money for 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 just need to get away quickly. If you do have time to save for a vacation, that will be the least expensive way to travel.
Siphoning off a portion of your paycheck each pay period and putting it into an account that is not easily accessible, like an online high-yield savings account or short-term certificate of deposit, is a simple way to have the cash on hand when vacation time rolls around.
Technology-based savings applications can link to your checking account, savings account, paycheck, or otherwise, and can help you achieve your travel goals well in advance.
Creating a vacation fund and saving ahead of time is our top way to financially 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, it’s best to fully understand the total cost and budget to determine if an extended repayment plan is necessary. 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 a convenience factor that is hard to beat when it comes to financing a vacation without a lot of planning. A home equity line of credit or home equity loan can also be a valuable borrowing tool for homeowners with good credit.
The addition of travel payment plans through travel agents, resorts, or other companies offers an alternative way to finance a vacation upfront and over time as opposed to a significant, one-time payment or a lengthy loan.
However, saving and paying for vacation with your own money is the best way to go if you can swing it. Even better if you pay for the vacation with a credit card to get the 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 send me a message using the contact form. Happy vacationing!