Are you dreaming of a major trip, but don’t quite have enough cash to make it happen? Here are some pros and cons when it comes to taking loans for vacations.
Worldwide, people spent $1,036 billion on travel in 2017. That equals $2 million a minute!
When you think about all the reasons people travel: to recharge, explore new places, experience culture, celebrate occasions and so on, you can see how it’s possible that so much money is dedicated to travel.
But what about when you can’t afford to take your dream vacation? Should you consider loans for vacations?
Read on. We’ll explain everything you want to know about travel loans and how to decide if it’s the right choice for you.
What is a Travel Loan?
There are many types of personal loans. Many people use a loan for a home (called a mortgage), to buy a car or to pay for post-secondary education.
A travel loan is a personal loan for a vacation. People who want to travel but don’t have the savings in order to pay for the trip may be curious about a travel loan.
But is a loan for traveling a good choice?
The Problem With Borrowing Money to Travel
Traveling is a depreciating asset. Unlike a home or a business which you can later sell at a profit, a trip to a far-off place can’t be sold or used as collateral.
Sure, traveling is an experience that is rewarding. But, not in a monetary sense. Travelling is only valuable to the person doing it, it isn’t a tangible thing that you can use.
The main question you need to ask yourself if you plan to take out a loan to travel is, how long will it take me to pay this off?
You might be repaying a loan for years after your trip. In that case, it may not have been worth it.
Especially because you aren’t only paying back the cost of the trip, you’re also paying interest and any other fees.
Let’s say you borrow $5000 so you can take a trip all across Europe. And let’s assume your interest rate on your credit card is 17%.
If you pay this trip off in 10 years, the total cost you pay will be over $10,000. That means you spent more than double the cost of the trip and are still paying it off a decade later.
If you love to travel, chances are you won’t be satisfied with the one trip for your whole life. But you probably won’t be able to take another trip for a decade while you pay off the first trip.
Yet, you may feel that a travel loan is a good idea for your situation. Maybe there’s a pressing reason why you should take that trip now instead of saving for it.
If you feel you can commit to a rigorous repayment plan to avoid paying double the cost of the trip, then a travel loan may be an OK idea. Follow these tips to keep costs down and save money.
Cash in Rewards
Many credit cards offer reward points that can help offset the cost of your trip. If you have enough points or miles, you can use them to pay for your airfare or hotels.
If you are a judicious user of a credit card, it may be worth it to switch to a credit card that offers good travel rewards. That way when you buy groceries and fill up your car with gas, you are closer to another trip.
Set a Budget
It can be extremely easy to blow a lot of money when traveling. With all the exciting new things to see and do and buy, you may quickly spend much more than you anticipated.
Worse still, you might not borrow enough to make it through the trip. Or you might not need as much as you borrowed but will spend it anyway.
The responsible thing to do is to set a realistic travel budget and stick to it.
First, find out how much your flights, trains, and hotels will cost. Then find out how much it costs to eat per day in whichever city or country you are traveling to.
Plan out an itinerary and include the tourist spots you want to visit and add in the admission costs to your budget.
Be thrifty. Find cheap airfare and cheap and free sleep options.
Once you know how much your trip will cost you can start looking for the right travel loan.
Weigh the Differences Between Personal Loans and Credit Cards
Now that you know approximately how much money you need to fund your travel, consider how you want to finance it.
Personal loans and credit cards are the most common methods.
Credit cards allow you to pay for your trip on the go so long as you haven’t reached your credit limit. If you don’t use all your credit, you only have to repay what you used.
Yet, credit cards tend to have a higher interest rate than loans. If you are using your credit card to withdraw cash at overseas ATMs you may also be hit with service fees and fees for converting currency.
Many travel credit cards don’t charge foreign transaction fees and offer other travel perks like cancellation insurance.
Yet, not everyone is eligible for credit cards. If you have bad credit, your credit card application will likely be denied.
A personal loan gives you a set amount of money, a set repayment schedule, and monthly payment. Usually, personal loans have lower interest rates than credit cards.
And there are many online loans for bad credit available for people who would not qualify for a credit card or loan from a bank.
Bottom Line on Loans for Vacations
If you decide getting loans for vacations is the right choice, make sure to do your research and find the method that is most advantageous.
Or you may decide to wait for your vacation until you can afford it outright. Coming home will be that much better if you know that a looming bill is not waiting for you.
Next, check out this list of 10 countries you can visit without breaking the bank. Safe travels!