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You can use a personal loan for a vacation, but if you do, you may be paying for your trip long after you return home.
While it can be tempting, using a personal loan for any discretionary spending, like a vacation, is almost never a good idea. Here are some reasons why financing your vacation with a loan might be a risky move, plus a few better options―so your little getaway doesn't trip you up financially.
Why You Shouldn't Use a Personal Loan for a Vacation
While a personal loan can help pay for travel-related costs like airfare, transportation, hotels and meals out, it's probably not ideal. Here's why.
- It's added debt that may be difficult to pay off. A personal loan adds to your overall debt burden. If you currently have trouble making payments on other debts, like student loans, credit cards or a car loan, then racking up another balance that has to be paid back (with interest) is risky and may not be practical financially.
- It will increase your DTI. Debt-to-income ratio, or DTI, is the percentage of your total monthly income that goes toward paying your debts. This may include your mortgage or rent payment, credit cards and other loans you may have. Lenders prefer a low DTI, ideally in the range of 36% or less. So if your bills are taking up a larger portion of your income, taking on additional debt for a vacation can make it more difficult to get additional financing in the future.
- A new loan can impact your credit score. When you apply for a personal loan, your lender will do a hard inquiry on your credit report, which could cause your credit score to take a slight dip. Making on-time loan payments can raise your credit score and help build it over time. But missing payments can do just the opposite, making it more challenging to qualify for any type of credit in the future.
- A personal loan comes with interest and possibly other loan fees. As of May 2022, the average interest rate for a 24-month personal loan was 8.73%, according to the Federal Reserve. And with base interest rates increasing in recent months, that figure likely will creep up. When you take out a personal loan, you'll repay not only the principal amount borrowed, but also interest and other fees, which can add to the total cost of your loan. That means the price of your vacation just got more expensive.
To help you gauge how much you'll pay each month for your vacation and how different loan offers impact your monthly payment, input the loan amount, estimated interest rate and repayment term into the personal loan calculator.
Personal Loan Calculator
†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
Better Ways to Pay for a Vacation
Using a personal loan to pay for your vacation is not recommended and will likely cost you more in the long run. Rather than taking out extra debt for what should be a relaxing getaway, here are some options to help you finance that trip.
Instead of taking on more debt in the form of a personal loan, finding ways to save up and pay for your vacation—interest-free—is always a better plan. This doesn't mean tapping into your emergency fund, but instead creating a travel savings budget that aligns with your finances and your overall financial goals. You might start by setting aside a little from your paycheck each month or reducing your spending on nonessentials. It can take time to build your vacation fund, but it can be much less expensive than a personal loan that is paid back over time.
Credit Card Rewards
Considering that 62% of participants of the American Express Global Trends Travel Report say they planned on taking between two and four trips in 2022, finding a way to pay for all that time away can be tricky.
Many credit cards offer cash back or travel rewards credit card programs that can help reduce the amount you pay out of pocket for your vacation. In fact, you may be able to pay for a large portion of your hotel and transportation costs by taking advantage of these programs. Before taking out a loan, check your rewards balance to see if a portion (or all) of your costs can be covered.
Intro 0% APR Credit Card
A credit card with an introductory 0% APR can help finance your vacation, and you won't pay interest on any charges you rack up during this promotional period as long as you pay off the balance before the intro period ends. Introductory periods vary, but some are as long as 21 months. That allows you to space out payments without the added expense of interest charges.
However, using an intro 0% APR credit card can be risky because, at the end of the promotional period, any remaining card balance will incur interest at the standard rate in your credit card offer. Also, be on the lookout for promotions with a deferred interest offer. That means that if you can't or don't pay off the entire balance by the end of the promotional period, you will be charged interest going back to the date of the original purchase, which will then be tacked onto your remaining balance. That makes creating a repayment plan to pay off your vacation costs quickly during this intro period even more important.
The Bottom Line
Using a personal loan to fund a vacation can be tricky, especially with the added cost of interest and other fees. But at times, a personal loan may make sense, such as if the trip is for an emergency and you need the funds fast, or you have good credit and the money in your budget for another payment.
If your budget is stretched thin or you have poor credit, you may want to consider another option. Check out your credit score at Experian—for free. That way, you'll know if a personal loan for your next big vacation is the best option for you.