Taking out a vacation loan, also known as a personal loan, for post-Covid travel expenses may seem enticing. However, it’s not something we recommend, even if it sounds like a handy way to finance your dream vacation. Whether you have the urge to travel locally or abroad, there are risks you may face if you decide to take out a vacation loan.
Before cashing in on a personal loan and jet-setting around the world, learn about these potential risks and other strategies you can use to safely finance your post-Covid vacations.
How a Vacation Loan Works
A vacation loan is an unsecured personal loan that you can use to cover travel expenses. Vacation loans and traditional personal loans work the same way: You’ll receive money as a lump sum and repay it through fixed monthly payments with a fixed interest rate. Repayment periods typically are between two and seven years and loan limits are $250 to $100,000.
The terms you’ll receive largely depend on your credit history and income. Highly qualified borrowers who boast good to excellent credit (scores of at least 670) typically receive the most favorable loan terms, such as low interest rates and larger limits. However, just because you can get a large loan limit doesn’t mean you should.
When taking out a personal loan for any purpose, not just a vacation, you should always borrow only what you can afford to repay. If you fall behind on payments or, even worse, default on your loan, your lender can send your loan to collections, which could severely damage your credit.
4 Risks of Using a Vacation Loan for Post-Covid Travels
Getting a personal loan to pay for non-emergency spending, like a vacation, can lead to poor financial habits. Ideally, your vacations should be something you save up for and not something you go into debt for. Using a personal loan for post-Covid travel expenses could prove problematic. Here’s why.
1. Your Vacation Will Cost You More Money
The cost of your vacation can vary depending on how many of you are traveling to and where you’re planning to visit. You may be loading the kids in your car for a local road trip, embarking on a solo trip overseas or heading to a beach with your significant other. And while there are ways to keep these vacation costs to a minimum, taking out a personal vacation loan will only make your vacation more expensive.
When you take out a personal loan, whether for a vacation or any other reason, the lender will charge you interest and other financing fees—like an origination fee—on top of the amount you borrow. This means your vacation will cost you even more money than you originally planned.
For example, let’s say you took out a $5,000 loan with an annual percentage rate (APR) of 7.99% and repaid it over 24 months. You’ll owe $219.03 in interest over the life of the loan, the Forbes Advisor personal loan calculator shows, meaning your $5,000 loan will actually cost you $5,219.03.
2. You’ll Be Stuck With a Monthly Payment
Not only will a personal vacation loan hike the cost of your trip, but you’ll also be stuck with monthly payments until it’s repaid. Personal loans typically have repayment terms between two and seven years. If you choose to take out a loan for your post-Covid travels, you could be stuck paying for your vacation years after you return home
3. You Can Damage Your Credit
It’s one thing to have monthly payments hanging around long after your vacation, but it’s another to fall behind on those payments if you face unexpected financial hardships. If the coronavirus pandemic has shown us anything, it’s that you never truly know what’s coming, like the unemployment rate that peaked at 14.8% in April 2020 in response to Covid-19-related job loss.
While you may be able to afford your loan payments when you get your loan, that may not be the case in the future. You may experience unforeseen job loss or an unexpected expense that takes priority, which can impact your ability to meet your repayment requirements. Because your payment history makes up 35% of your credit score, falling behind on your payments or defaulting on your loan can severely damage your credit.
What was once supposed to be a relaxing and enjoyable post-Covid getaway may quickly turn into a costly decision that can put a dent in both your credit and wallet.
4. You May Put Yourself in a Debt Trap
If you take out a vacation loan, you may check off a bucket list item now but find yourself in a debt trap later. You can avoid this by following responsible loan practices; however, you may find that challenging if you need more money before your original loan is paid off.
For example, let’s say you want to take one family vacation every year. If your loan has a repayment term of two years, you’ll still owe money when your next vacation comes around the following year. This may make it hard to afford another trip, so you might be eager to take out another loan to help cover the costs.
Not only will you have one year left on your first loan, but you’ll also have to make payments on your second vacation loan if you decide to take one out. Using loans in this manner can quickly increase your debt, making it hard to afford your monthly payments and leaving you in a spiraling debt trap that you can’t seem to escape—not where you want to be
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 post-Covid, 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. If you have direct deposit set up through your employer or other payment software, check to see if you can automatically distribute your money into a savings account when you’re paid. You can typically choose a set dollar amount or percentage of your paycheck to be distributed automatically.
- 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 money you already plan on spending. Opening a travel credit card before your trip can help you earn points or miles that you can redeem for travel expenses. For example, if you rack up enough rewards, you could possibly cover the costs of your flights without touching a dime from your savings account. This can reduce the overall cost of your vacation.
- 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, such as Scott’s Cheap Flights, is an easy way to track down a ticket that can lessen the dent on your wallet.
Post-Covid Travel Planning Tips
Although we don’t know how travel will truly look once borders reopen, it may look quite different than before the pandemic. If you’ve put money aside and plan on taking a trip when you feel safe, take extra precautions and follow these tips:
- Consider getting travel insurance. Even when travel ramps back up, Covid-19 will most likely make trip plans uncertain for some time. Travel insurance can help protect your wallet if you need to cancel your vacation. While some credit cards include travel insurance, not every card does and not everyone has a card. If your card doesn’t offer insurance or you don’t have a card, consider other travel insurance companies.
- Check your airline’s cancellation policies. Over the course of the pandemic, airlines have relaxed their cancellation policies and fees as a strategy to attract travelers. However, that doesn’t mean these new policies are forever. Because they can change in the future, be sure to confirm your airline’s current policies before booking. And if its policies aren’t lenient, you may want to consider a more flexible airline.
- Review any travel restrictions at your destination. The restrictions in your hometown are most likely different than those at your destination. Before leaving on your trip, be sure to familiarize yourself with your destination’s travel restrictions, if any. This will ensure a smooth vacation.