Should you use vacation loans to cover travel expenses?

A vacation is a fun and exciting way to relax, spend time with family and friends and explore new places. It can also be expensive: The average cost for one person to go on a week-long vacation in the U.S. is $1,993, according to Budget Your Trip. Some travelers turn to vacation loans to make trips possible.

But paying for a getaway by borrowing money is a risky financial choice. If you’re considering this type of borrowing, it’s important to know how vacation loans work and understand their pros and cons.

Vacation loan statistics

• More than 1 in 3 (36%) of those who plan to travel this summer are willing to go into debt to pay for it, according to Bankrate’s Summer Vacation Survey.
• The top trending U.S. destinations for the first half of 2024 include Hyannis, Massachusetts; Cody, Wyoming; Bar Harbor, Maine; Sitka, Alaska and San Francisco, California.
• The average domestic traveler in the U.S. spends $1,993 per person on a week-long vacation, which translates to about $283 per day.
• In 2024, the average American household was expected to spend $2,843 on their summer vacation, according to Allianz Partners.
• According to American Express, 79% of millennials and Gen Z travelers care more about the right travel experience than the cost of the trip followed by 75% of Gen X and 72% of baby boomers.

Is a vacation loan a good idea?

Vacation loans can help you take the trip of your dreams, but we recommend against using them. Before considering a vacation loan, you should try to save up and budget for a trip so that you can afford it on your own.

“Travel can offer enriching experiences and potential personal and professional growth experiences, making it a wise investment in certain circumstances. However, taking on debt for leisure travel without a clear financial plan could lead to unnecessary financial strain in the long run,” says Annette Harris, an accredited financial counselor and certified financial fitness coach with Harris Financial Coaching.

Taking a loan for a non-essential expense such as a vacation can strain your budget and limit your future financial opportunities, says Harris.

Vacation loans may be justified in two circumstances:

• When you are taking a trip for unavoidable, emergency reasons (such as to care for a sick loved one).
• When you’re taking a once-in-a-lifetime trip, like a honeymoon, and are confident you can repay the loan without missing payments, tapping into your emergency savings or putting off more-important financial goals.

If you are considering taking out a vacation loan, take a hard look at your budget and consider the pros and cons first.

Pros of using a vacation loan

• Fixed monthly payments. Because payments are fixed, you will pay the same amount each month, making it easy to plan ahead.
• Potential for lower interest rate. Depending on your credit, personal loans often have lower interest rates than alternatives like credit cards. If you were planning to use a credit card to pay for your trip, a vacation loan could be a lower-interest alternative.
• Help fund emergency travel (or higher cost travel). If you are taking a trip out of necessity rather than pleasure and it is time-sensitive, a vacation loan could be a great option to enable you to travel more quickly.

Cons of using a vacation loan

• Interest increases the cost of the trip. If you take out a loan, you will have to pay interest on top of the expenses of the trip itself.
• Fees can decrease your loan’s value. Many lenders charge an origination fee, which is deducted from the loan proceeds. Always look into the fees a lender charges before applying.
• Monthly payments. If you take out a vacation loan, you will be on the hook for monthly payments until it is paid off. This means that you could be paying off your trip months after the fact. Taking out a loan is a long-term investment.
• Can negatively impact your credit score. If you are late making payments or default on your loan, your credit could take a serious hit — and the lender may even take you to court.

How do vacation loans work?

A vacation loan is an unsecured personal loan you can take out to help cover travel or vacation-related expenses. Vacation loans can be used to cover any and all travel expenses, including transportation, lodging, food and entertainment. You can get a vacation loan from any lender that offers personal loans, which include banks, credit unions and online lenders.

“An aspiring vacationer can borrow a lump sum of money and then repay the amount they borrowed plus interest through fixed monthly payments over a set period of time,” says Dani Pascarella, founder and CEO of OneEleven Financial Wellness. “It is no different than a personal loan used for another reason.”As Pascarella points out, using a vacation loan means your vacation will inherently be more expensive because you’ll need to pay interest.

“You will also spend months or even years paying off the loan, which means you can’t use that money for other things you may need in the future,” adds Pascarella.

How to get a vacation loan

1. Check your credit score. Different lenders have different minimum credit score requirements, but you generally need good to excellent credit to qualify for a lender’s lowest rates. Your credit score is also an important factor in determining the rates you’ll receive. If your credit is less than stellar, look into lenders that work with bad credit borrowers. But beware: These lenders may charge interest rates that exceed typical credit card interest rates.

2. Research lenders. Compare lenders to find the best personal loan interest rates. Many lenders allow you to prequalify to view rates without hurting your credit. Also consider the fees charged, minimum and maximum loan amounts, repayment terms and any additional features offered by individual lenders.

3. Submit your application. Once you have chosen a lender, submit a formal application, including identifying documents like your ID, W2s and pay stubs. If you are approved, the next step is to sign off on the agreement, receive the funds and begin paying back the loan in monthly installments.

Bankrate tip

Many lenders offer fast approval and funding within just a few days. However, we recommend applying for a travel loan at least a month before your planned vacation to help with budget planning.

How has inflation affected travel costs?

While the U.S. economy has been struggling with stubborn inflation for the past few years, the rate of inflation is finally cooling. The consumer price index for airfares is down 5 percent year-over-year as of June 2024, according to the U.S. Labor Department’s Bureau of Labor Statistics.

According to the U.S. Travel Association’s Travel Price Index for June 2024, “inflation is easing across the board — and travel-related goods and services are at the forefront.” June marked the second month running that travel prices fell at a steeper rate than the overall economy, according to the TPI. Hotel, airline and gas prices are all declining, according to the index.

Still, some expenses related to travel remain elevated, Statista research found. Costs associated with recreation, for instance, are up 4.1 percent between 2023 and 2024, while food and beverage costs are up 4 percent during the same time period.

Of Americans planning to skip their summer vacation this year, nearly two-thirds (65 percent) cited affordability as their main reason, according to Bankrate’s Summer Vacation Survey.

4 best vacation loan lenders

Prosper

Prosper loans offer annual percentage rates (APRs) as low as 8.99 percent. Loan amounts range from $2,000 to $50,000. The lender was Bankrate’s pick for best personal loan for fair-credit borrowers in 2024. Plus, you can add a creditworthy travel buddy as a co-applicant for a chance at lower rates.

Avant

Despite Avant’s higher rates and fees, it’s worth a look for borrowers with credit scores as low as 580. You can borrow $2,000 to $35,000 from Avant for vacations. Rates range from 9.95 percent to 35.99 percent with loan terms from 2 – 5 years. Note that Avant charges an administration fee of up to 9.99 percent, as well as late and dishonored payment fees.

LightStream

If you have good or excellent credit and are planning a pricey vacation, check out LightStream. Its rates of 7.49 percent to 25.49 percent are among the lowest in the business, and it charges no fees. You can get your rate reduced as much as 0.50 percent by signing up for automatic payments. Amounts range from $5,000 to $100,000. But prequalification isn’t an option with LightStream, so check your rates with other lenders first.

SoFi

SoFi loans start at $5,000. Like Lightstream, its repayment terms last 2 – 7 years. That makes its loans best suited for major, expensive travel. With SoFi, you could get your funds as soon as the day you’re approved.

What are alternatives to vacation loans?

Before taking out a vacation loan, investigate these alternatives.

• Budget and save. Long before you travel, spend time researching the cheapest travel and lodging options, as well as looking up tips and tricks for cheap travel in a certain area. Add up your likely expenses. Then, start putting aside money from each paycheck until you’ve saved enough to cover your trip.
• Travel cards and reward cards. Many credit card companies offer perks and reward programs for traveling. This could help you cut travel costs, with some cards even awarding airline miles as you spend and pay off the card. Your card may also offer cancellation insurance or fee-free foreign transactions. But be aware that credit card debt can grow fast.
• Travel with a bigger group and split expenses. Sharing accommodations can reduce your costs significantly.
• Find discounts. There are often discounts available if you search for them. Do your research to find the cheapest flights, hotel rooms, etc. There are almost always deals to be found online.
• Choose a less costly vacation. If the vacation you’re planning will break your budget, consider a shorter trip or switch to a less-pricy destination.
• Wait until the offseason. Prices are higher in certain areas during certain times. For example, it is more expensive to go to the Bahamas during the summer than it would be to go during the fall or winter. Consider visiting your chosen location during the offseason to take advantage of lower prices and less crowded destinations.

The bottom line

Vacations offer a great opportunity to relax, spend time with loved ones and explore new cultures and places, but they are not an essential expense or something that you should incur substantial debt to pay for.

If you can’t wait to save up to cover the costs of a vacation and are confident you will be able to pay back the debt, a vacation loan can offer one way to finance an upcoming trip. However, you should research and compare financing options before making that decision. Saving up and finding deals is always a better option than taking on debt.