Paris. London. Madrid — some of the most beautiful cities in the world. If you’ve dreamed of visiting those sites or touring through Europe, you’ve likely priced out a vacation to make that dream a reality.
Chances are, you were blown away by the sky-high prices of airfare and hotel stays. A week-long trip to Europe can easily cost thousands of dollars. Most people don’t have that much money tucked away into savings, and can’t afford to pay for a vacation in cash.
But if you’ve always wanted to go abroad and are determined to do it, one financing option to consider is to take out a personal loan. Here’s what you need to know about this approach.
Using a personal loan for vacation
Using a personal loan to pay for a vacation is never ideal, and no financial expert would ever recommend you do it. Instead, you should aim to pay for your trip in full with cash from your savings or checking account.
Unfortunately, most people don’t do that. In fact, a 2017 survey found that Americans accrue $1,108 in debt for a vacation, on average.
Going into debt for a luxury like a vacation isn’t a great idea. But if you have the opportunity to go on a once-in-a-lifetime trip and you simply can’t miss it, taking out a personal loan can be a better option than charging your vacation to a credit card.
That’s because personal loans tend to have much lower interest rates than credit cards. With a credit card, you’ll typically have interest rates of 20% or higher. By contrast, those with good credit and stable incomes can find personal loans with rates as low as 5%. By using a personal loan instead of a credit card, you could save hundreds or even thousands of dollars.
With a personal loan, you also have a fixed repayment term. As you make payments, you steadily make progress against the debt, and you’ll know exactly when your loan will be paid off.
However, there are some things you should keep in mind before applying for a loan:
1. It could take you years to pay off your trip
With a personal loan, you can choose a repayment term that works for your budget. Some lenders offer terms as long as seven years. While a longer term may sound attractive because it gives you the lowest monthly payment, you’ll pay more in interest fees over the length of the loan. And, making payments on a vacation you took years ago and be frustrating and depressing.
2. You may not qualify for a low interest rate
While personal loan lenders often advertise very low interest rates, only borrowers with excellent credit will qualify for them. If your credit is less-than-perfect, you may have to settle for a loan with a higher rate. Over time, you’ll pay back more in interest fees, adding to your vacation’s cost.
3. A personal loan could affect your ability to qualify for other forms of credit
When you take out a personal loan, you increase your debt-to-income (DTI) ratio. Lenders look at your DTI ratio to determine your ability to repay loans or lines of credit. If it gets too high, they won’t approve you for a loan.
If you plan on buying a new car or a home in the near future, having a personal loan on your credit report could hurt your chances of qualifying for an auto loan or mortgage.
Applying for a personal loan
Taking out a loan to pay for a non-essential expense like a vacation isn’t advisable. However, going into debt to pay for trips is incredibly common. If you’re thinking about using a credit card to pay for your next adventure, take a step back and consider using a personal loan, instead. By shopping around and comparing offers from multiple personal loan lenders, you can find the best rates and even save money on your vacation.
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