By Amber King & Mikelle Rogers - Telcoe Federal Credit Union
According to TRAVELPULSE, an average household in America is estimated to spend an average of $2,830 for a vacation this summer. Luckily, many banks and credit unions now offer vacation loans.
What is a Vacation Loan?
A vacation loan is an unsecured personal loan used to pay for travel expenses. In essence, it allows individuals to cover various travel-related costs, including accommodations, dining, airfare, car rentals, and other related expenses. They do not require collateral and are based on the borrower’s ability to repay the loan in monthly installments.
What is an Unsecured Loan?
Since there is no collateral required for an unsecured loan, many lenders will have other requirements such as your credit history, proof of income, proof of employment, and a qualifying debt-to-income ratio. Other examples of unsecured loans include student loans, credit cards, moving expenses, and debt consolidation.
How do they work?
Vacation loans work just like personal loans. The bank or credit union will typically lend you a certain amount of money and there will already be a fixed repayment plan that you will pay back. For example, a $500 vacation loan for a 1-year term, and then repay $45 monthly for 12 months. The interest rates for these types of loans vary based on many factors such as a credit score and debt-to-income ratio. Credit unions offer very competitive rates on all types of loans. Shop around for the best rate.
The Pros and Cons of a Vacation Loan:
Now that we have discussed the basics of a vacation loan, let’s dive into the pros and cons of using a loan to finance a vacation.
Lower interest rates: Many people use a credit card for everything when going on a vacation. Most credit cards charge an adjustable interest rate between 18% - 35%. Depending on your credit score, a fixed rate vacation loan rate may be as low as 8%-18%.
There is no risk to personal property. Since this is an unsecured loan, there is no collateral requirement like a secured loan.
The loan process will be much faster than a secured loan because there are no assets to appraise.
Requirements may be more extensive. Poor credit scores or a short financial history could defer someone from qualifying. Rates are based on your credit score and credit experience. Paying a high rate, possibly over 18%, can defeat your long term financial goals. If you need to establish credit you may want to consider a Credit Builder Loan.
Repayment terms on unsecured loans can be much shorter than other loans. Most lenders require vacation loans to be paid back within 1-3 years.
Who are Vacation Loans best for?
Most people can secure a vacation loan but deciding if it’s the right thing for you can be difficult. Vacation loans are best used for once-in-a-lifetime trips, special occasions such as a honeymoon or destination wedding. Vacation loans, like all loans, can impact your credit score so making sure that you are considering all factors is key. Take into account your regular budget and how you plan to pay the loan back. You may want to review your credit history first and you can do so at no cost with Greenpath Financial Wellness, a partner of Telcoe Federal Credit Union.
Why you shouldn’t use your Credit Card for Vacation Expenses:
The interest rate on a credit card is usually high, depending on what type you have. Some credit cards have an interest rate of 18-30%. For example, if you pay $4,000 for a vacation, depending on how long it takes to pay it off, it could end up costing you $6,000. Your credit card utilization should not exceed 30% of the card limit. When you put more charges on the card, exceeding 30%, you risk decreasing your credit score. Paying off a credit card balance is crucial, due to the effect that it can have on your credit score. Credit card companies entice you to continue charging and to only pay the minimum balance due each month. This way they increase their income. A good rule of thumb is to never put money on a credit card unless you have cash to pay it off right within 30 days if you needed to.
How to Fund Your Vacation without a Loan or Credit Card:
Many credit unions offer savings club accounts. These are sometimes customizable to fit your needs. If you decide a loan is not the right path for you, consider opening a vacation club account. These are usually on payroll deduction. This means if you are paid twice a month, you would choose the amount to put away each pay period. For example, if you save $50 per paycheck, that would be $100 a month going into a vacation savings club account. This also allows you to build saving habits for your future self. The vacation club account also allows you to keep your money out of sight, out of mind. This is for your benefit because when it comes time for a vacation, you will be able to use that money to pay for expenses.
For additional information on vacation loans, click the link below!