Chilling in the Bahamas and sipping margaritas under the sun. That’s the dream, right? Unfortunately, going on a vacation is financially challenging for some people. Not everyone makes a six-digit salary to afford a trip to an exotic location. However, if you are exhausted from work and need some time to relax, you need to take a vacation. But the million-dollar question is, “How do I go on a vacation?”
Most people can’t stick to a budget because their variable expense is too high. Maybe your son is turning 18, and he needs a car, or you need money for home renovation. These are all the reasons you break your vacation savings to finance your needs. However, if you are comfortable with small monthly payments, a vacation loan is just what you need.
In this guide from Nifty Personal Loans, we will share the problems with vacation loans and how to take out a vacation loan the right way. So keep reading to know more about how to finance your dream vacation.
What is a Vacation Loan?
A vacation loan is a personal loan you can utilize to finance your expedition. Most financial institutions don’t advertise personal loans for vacations, but you can use the money however you like. You can finance your accommodation, airlines expense, car rental, food, and other luxuries through a vacation loan. These loans are usually unsecured, meaning you don’t have to keep collateral with the bank. However, the interest rate on vacation loans is usually higher than other forms of loans.
Con’s of Vacation Loans
Financial wisdom advises against borrowing money for depreciable assets like cars. However, vacation loans are the worst. You will be borrowing money for something intangible and only important to you. Unlike investing in a business or taking out a loan for a house, vacation loans don’t bring monetary benefits. But, they make great memories. So ask yourself, “How important is making these memories to me?” before taking out a vacation loan since you will be paying back the loaned amount long after you have enjoyed your adventure.
Mathematics Behind Vacation Loans
The average interest rate on credit cards is 20.25% as of August 2021. Assuming you borrow $5000 as a personal loan, you will be paying back $6000. If you break this into small amounts into 2 years, you will pay $250 per month. So think twice before taking out a vacation loan.
How to Take Out a Vacation Loan The Right Way
Before you apply for a vacation loan, ask yourself, is it worth it? Are you ready to pay for your Mediterranean cruise for five years when you plan a family or save money for a house? Some people like to live more than worry about their future. So If you are ready to take a vacation loan, you might as well do it the right way.
Use Rewards Points to Reduce Cost
If you can plan early and have a good credit score, you should explore different airlines and hotels with your reward points. This strategy can drastically reduce travelling costs because some exotic locations have expensive hotels that eat most of your vacation budget. You can cash reward points worldwide, so explore how you can reduce vacation costs with reward points.
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Stick to a Budget
Budgeting is important before you take out a vacation loan. You will need an exact expense breakdown to ask for a personal loan. Explore different hotels and locations and call them to check their availability. Confirm if these hotels have a discount offer or an off-season when rates are cheaper. You will have the same experience on off-seasons with a little more privacy. Plus, hotels are cheaper on off-seasons, so you’ll be saving a lot of money in the process.
Moreover, do your research to find the most affordable eating places. Food is the biggest expense of your trip. If you are travelling with children, you will need some extra money for food. You never know when kids throw their tantrums for a big dinner. However, with a budget, you can minimize the amount of your vacation loan. Plus, repayments will become easier, and perhaps, you’ll quickly wrap up your loan.
Improve Credit Score
If you plan to take a mortgage loan after 2-3 years, then a vacation loan can help you. Mortgage loans factor in your credit score. If your credit score is low, you’ll pay a hefty amount of interest rate. So if you want to improve your credit score, you’ll need to take loans and pay them on time. What’s the best way to take out loans if they are necessary for a brighter future? – vacation loans. If you go for a car loan, your borrowed amount will be too high, and it’ll take longer than 2 years to pay back everything. So stick to vacation loans if you want to improve your credit score.
Personal Loan Vs. Credit Card – Do the Comparison
Finally, it is best to compare credit card interest rates with a personal loan. Plus, if you have more than $5000 on your credit card, you can do a better comparison. Talk to different financial institutions and get an idea about personal loan interest rates and other applicable fees. Do a thorough comparison and choose the best option. Don’t worry; both credit card and loan payments can help you improve your credit score.
Although financial wisdom advises against taking out a loan for depreciable assets, you should get a vacation loan if your memories are worth more than a few thousand dollars. Moreover, vacation loan payments can improve your credit score, so that’s a plus point!
Make sure you explore all the options that will save money. The world awaits you, but the best vacation is one that doesn’t disturb your finances.