American’s are spending more and more money on their vacations per year, to the tune of 10 or even 15%! They are stressed out and ready to splurge on that vacation.
But when you’re ready to take that trip, how do you plan to pay for it?
Taking out a personal loan could be a viable solution to help you afford that family trip, but how does it work? And is it a wise choice?
Let’s explore why using a personal loan could be the ticket to the vacation you need.
What is A Personal Loan?
A personal loan (or, in this case, a travel or vacation loan) is a loan you borrow to help you fund an expense. A personal loan can be for practically anything – house repairs or renovations, credit consolidation, education, and more.
The attraction of a personal loan lies in the fact that they often have a lower interest rate than credit cards.
A Credit Card Vacation?
With all of the travel perks and points associated with credit cards for traveling, it’s tempting to pull out the plastic to fund your vacation. It’s convenient, yet there could be some serious drawbacks.
1. With credit cards, you could easily overspend. Some credit cards have a large spending limit, making it easy to decide you need just, “One more thing.” After your trip, if you haven’t budgeted accordingly, you’re left with wonderful memories linked with a mountain of debt.
2. The rate on credit cards is usually higher than personal loans, with most APR’s hovering around 15% or potentially higher.
3. A high debt-to-income ratio can hurt your credit score. Using your credit card to make large purchases like hotel costs, rental fees, and others, racks up your card balance rapidly and could decrease your FICO score.
4. If you’re planning to travel internationally, be cautious about foreign exchange fees on your card. These fees happen every time you make a transaction across seas. Each transaction can cost you on average anywhere between 1-3 cents.
4. Many international places will not accept payment unless your card as an EMV chip. You would need
5. The best way to avoid damage to your credit score is to be prepared to pay off the card in full at the end of your vacation. This also means you must budget and commit to not overspending. A the end of your vacation, you could be higher in debt than before you left, creating a stressful time for yourself.
7 Reasons to Use A Personal Loan to Fund Your Vacation
A personal loan could be a better route when it comes to supporting your vacation dreams. Here are seven reasons why personal loans are a better choice over credit cards.
1. Fixed amount
Unlike a credit card limit, your loan has a fixed amount. This means once you’ve used the entire amount of the loan, there are no increases. If you estimate that you need a loan for a specific amount, you can request this amount and only spend that much, versus spending more on a credit card.
2. Consistent Payments
With personal loans, the payments are consistent and predictable. You know exactly what the payment is per month which makes it easy to insert into your budget. With a credit card, your payment fluctuates with your spending and interest, making it challenging to gauge the exact payment per month.
Depending on your rate and loan amount, the life of the loan can be anywhere between two to five years. Missing a payment, however, can negatively impact your credit score.
3. Lower Rates
Personal loans offer much lower interest rates than credit cards, often in the single digits for great credit. Sometimes these rates will be in the lower teens, but again, it all depends on your credit. Better credit lower equals lower interest rates.
Lower rates are one of the most appealing aspects of personal loans when compared to credit card rates.
4. Avoid Revolving Credit Balances
Your revolving balances on your credit card have a direct effect on your credit score. Lenders look at your debt-to-income ratio when they’ve considering lending you money. High and unpaid balances can cause significant damage to your credit score, especially if you’re only making the minimum payments on credit cards.
5. Less Stress
Vacationing should be a time to escape from your worries and enjoy it with your family. When you are using a personal loan to fund your vacation, you don’t have to worry about overspending because of the fixed limit. You can return home refreshed, knowing exactly what to expect with your personal loan.
6. Loans to Fit Your Needs
There are different types of loans to fit your needs. Below are a few you might consider:
Fixed Interest Rate Loan: The interest rate on a fixed interest rate loan is set and will not budge. There may be some stipulations, so make sure to read the fine print before agreeing to the loan.
Variable Interest Rate Loan: Unlike the fixed interest rate, variable interest rates can change at any time. However, an advantage would be that could be lower.
Unsecured Loan: Unsecured loans means you have no collateral to secure the loan. Lenders will loan you money based on your credit score and credit history.
Secured Loan: Secured loans have collateral attached such as a car or a home. This can save you money on interest rates.
7. Pay it Off Quickly
Once you’ve used all the money in your loan, there is no more to spend. You can always choose to increase your payments to pay off the loan more quickly as long as it’s within the terms of the loan.
On the other hand, you can keep choosing to use your credit card after you’ve made some payments and the cycle of debt continues.
How to Get A Personal Loan
Personal loans are issued by banks and credit unions. Depending on your credit score, you may be to do a bit of shopping around to find the best rate.
Personal Loans for Vacation
If you find yourself stressed, burnt out, and desperately needing a vacation that can’t wait, a personal loan could be a great decision for you. With lower rates and payment predictability, they fit into budgets better than credit cards.
Looking for more information on personal loans? At Bonsai Finance, we treat your financial situation with compassion and care. Visit us today to learn more about what we do best.