A vacation loan might fuel an urgent trip (embark with caution)

Travel can be expensive, but sometimes it's necessary even if you don’t have enough cash on hand to pay for the trip. This might be especially true for people who need to travel to see faraway relatives during a family emergency, or take a trip for a must-attend family event like a funeral. A vacation loan could help make an urgent trip possible.

A personal loan is a tool you can use to cover expenses that are important to you. While it's not always a good idea to borrow for a vacation, there are some times when a vacation loan might be the option that makes the most sense.

What is a vacation loan?

A vacation loan is a personal loan that's used to pay for a vacation or other travel. A vacation loan could cover flights, hotels, cruises, car rentals, and other travel-related expenses.

Vacation loans tend to be personal loans. And usually, personal loans are unsecured loans. That means you'll need to qualify for the loan based on your own credit and financial details, not whether you own something valuable that you can borrow against.

How does a vacation loan work?

With a vacation loan, like other personal loans, you get all the money upfront in one lump sum. Then you repay the amount you borrowed, plus interest, in fixed monthly payments, usually in one to six years.

Most personal loans have a fixed interest rate. This means that your interest rate and monthly payment amount won't change for the life of your loan. For example, Achieve Personal Loans offers fixed-rate loans with the same interest rate from start to finish.

For many borrowers, the interest rate on a personal loan could be lower than the interest rate on their credit cards, which might make a personal loan the less costly option.

Before you sign up for a vacation loan, use a personal loan calculator to figure out the monthly payment. You can look at different rates, fees, and monthly payments to decide if a new loan payment would fit your budget.

Vacation loan vs. credit card vs. buy-now-pay-later (BNPL)

A personal loan isn't always the right type of vacation financing for every situation. Let’s look at three popular options and compare their features so you can choose the best one for your needs.

Vacation loan

• What it is: A personal loan used to pay for a vacation. You receive the money in one lump sum after your loan is approved, and you can't borrow more without applying for a new loan.

• Interest rate: Often lower than credit cards. The interest rate on a personal loan is usually fixed, which means it won't change for the life of the loan. Your payment amount won't change either, and you'll have a set payoff date.

• Repayment: Usually two to five years.

• When it's a better option: When you don't want to use a credit card to pay for a vacation, when your credit card limit isn't high enough to cover the trip, or when the travel is urgent and you can't put off the expense.

• Risks to consider: You might be paying for several years for an event that might only last several days. A loan for a luxury item like a vacation might also be a warning sign that you're spending above your means.

Credit card

• What it is: A revolving credit line that allows you to make purchases, pay down the balance, and borrow again, up to your credit limit, as long as your account is in good standing.

• Interest rate: Often higher than personal loans. The rate on a credit card is usually variable, which means it can go up or down along with market conditions.

• Repayment: Best when you can pay the balance in full each billing cycle. You technically only need to make the minimum payment each month, but this won't pay down your balance much or quickly. The longer you take to repay a debt, the more you'll pay in interest.

• When it's a better option: Use a credit card for a vacation when you can afford to pay off the bill completely that billing cycle. If you need more time to pay, a credit card might still be a good choice if you can get a very low interest rate compared to other borrowing options.

• Risks to consider: Credit cards have very low minimum payments that are designed to make the issuer money on interest, rather than pay off your debt quickly. Since cards tend to have double-digit interest rates, minimum payments could get expensive fast. Plus, credit cards can make it easy to keep spending, which could drag out your debt even more.

Buy-now-pay-later (BNPL) loan

• What it is: A short-term loan that allows you to make a purchase now and pay for it over several payments.

• Interest rate: Varies by product type. Could be lower or higher than a personal loan or credit card.

• Repayment: For 0% interest loans, typically two to eight weeks. For loans with interest, the repayment term could be a year or more.

• When it's a better option: When it's free and you can afford to make biweekly payments to pay off your balance in under two months.

• Risks to consider: Some people who can't afford to make the purchase today won't be able to afford it next month either. BNPL makes it easy to spend money, but often with unrealistic repayment requirements. Then, if you can't afford to repay your BNPL loans, you could get hit with late fees, damage your credit, or fall behind on other financial obligations.

What are the fees for a vacation loan?

Most lenders charge a fee for making personal loans. This fee, called a lender fee or an origination fee, is typically taken out of the loan amount before it reaches your bank account.

Origination fees typically range from 0% to 6%. As an example, a 5% origination fee on a $5,000 loan is $250, which is subtracted from your loan. So, the $250 fee will be taken out, and $4,750 gets deposited into your account.

Some lenders charge a prepayment penalty. That's a fee for paying off the loan ahead of schedule. Choose a lender that doesn't charge a prepayment penalty if your plan is to pay off your loan quickly to reduce the cost.

Another cost to consider is the fee for a missed payment. Late fees of $25 to $50, or between 3% and 5% of the monthly payment amount, are common. Make sure your loan payments are affordable and you have a repayment plan before you take out the loan.

How do you qualify for a vacation loan?

You need to meet the lender's requirements to get a vacation loan. Every lender sets its own requirements, but you'll likely need to have a fair or good credit score, a steady income, and a debt-to-income (DTI) ratio under the lender's limit.

Your DTI is your monthly housing expense and debts divided by your monthly before-tax income. Lenders use DTI as a way to make sure you can afford the loan payment. A DTI under 36% generally meets most lenders' affordability guidelines. Many lenders also work with higher DTIs.

Some people wonder if they can qualify for a vacation loan with less-than-fair credit scores. You could still get a vacation loan with lower credit scores. Lenders weigh your income and DTI alongside your credit history, so if you have steady earnings and a manageable DTI, this might strengthen your loan application.

Before you apply, get prequalified with at least three lenders to compare offers. Choose lenders that offer risk-free prequalification with a soft credit inquiry. A soft credit pull won't hurt your credit scores. While not a guarantee, prequalification could be a good indicator of your approval odds.

Is a vacation loan ever a good idea?

Here are some examples of when a vacation loan might be right for you:

• You qualify for a low rate. If you can't wait to save the money, good or excellent credit may qualify you for a low interest rate on a vacation loan, which could make the debt more affordable when compared to other financing options.

• Emergency travel is required. A sick or injured family member, or an important event like a loved one’s funeral, may require you to travel a long distance on short notice, before you have a chance to save up the money you need. Sometimes vacation loans are the best way to pay for these urgent travel costs.

When you might want to avoid borrowing for a vacation

A vacation loan isn't right for everyone. Here are some reasons you might want to avoid borrowing for a vacation:

• You have other debts that make saving hard. Struggling with multiple debts is a warning sign that you are spending above your means.

• Your income is unsteady. If you’re worried about losing your job or having hours cut at work, taking on a new personal loan for a vacation could be very risky. A new loan can make future, unexpected, expenses more difficult to pay for.

• You'd need to pay expensive loan fees. Vacation loan fees and high interest rates may force you to borrow more than your vacation will cost.

• You might need to borrow for something more important. A new debt on your credit report could make it harder to get a loan you need in the future, such as for an emergency like a leaky roof.

Tips for covering your vacation without a loan

Here are four other ways to pay for a vacation that don't require a vacation loan:

• Vacation savings account. Create a separate savings account for travel and add to it regularly. Choose a high-yield account so the money compounds all year long.

• Credit card rewards. If you have credit card points, you might get some travel expenses covered. Don't charge expenses you can't pay off just to earn rewards (it's rarely worth it), but if you already have the points, then use them.

• Pick lower-cost destinations. Instead of a trip to Rome in the peak summer season, visit lower-cost cities in Italy such as Florence and Naples during the off-season. Or pick areas closer to home, and stay in budget hotels or a vacation rental where you can prepare your own meals.

• 0% intro credit card. If you can qualify and you can afford to pay off the debt in a short amount of time, consider applying for a 0% promotional interest rate credit card and put your vacation expenses on the card. Have a clear plan to pay off the balance before the intro offer expires and interest starts to accrue.

Find out if you're eligible for a vacation loan through Achieve Personal Loans in minutes.