A vacation loan, which is a type of personal loan, is an option for those who require funds to pay for their vacation expenses. If you have a good credit score, you may find it easy to get a vacation loan at a low rate of interest. While this may seem like a great option if you are short on funds, you should consider the pros and cons of your decision.
Pros of Taking a Vacation Loan
Can help you pay for an emergency trip: There may be many times when you need to make an unavoidable trip. In such cases, a vacation loan can come in handy.
You won’t miss out on priceless moments: A vacation may give you the chance to witness some truly priceless moments like welcoming a newborn into the family or attending a friend’s wedding.
It’s less expensive compared to a credit card: If you have to make an impromptu trip, taking a vacation loan may be a better alternative than charging expenses to your credit card. Credit card balances usually attract a high-interest rate, making you spend more.
Cons of Using a Vacation Loan
Affects your credit score: Each time you apply for a loan, the lender makes an inquiry about your credit score, which will cause it to drop slightly. If you apply for multiple loans at around the same time, your credit score will drop by several points. Additionally, if you miss making repayments towards the loan, your credit score gets negatively impacted.
You pay a monthly interest: A vacation loan requires you to repay the interest, along with a certain percentage of the borrowed principal, on a monthly basis. So, based on what your repayment tenure is, the interest is something you’ll have to pay for several years to come.
You will have to make repayments for several years: If you take a vacation loan, the repayment will affect your disposable income for many years, reducing how much you can put in savings or investment options.
Taking a personal loan to pay for a vacation is usually not recommended since it puts you in debt for several months, if not years. What’s more, if your financial situation changes for the worse during this time, you could be under significant financial distress due to the additional debt.
