How to Use a Personal Loan for Vacation Expenses

How often do your daydreams turn to the bright lights of Paris, sand between your toes, or fresh mountain air? If that excitement quickly turns to disappointment when you check your bank account balance, don’t despair. You don’t necessarily have to save a lot of money before you take a trip. People can use a personal loan to fund vacations.

After all, a vacation loan is simply a personal loan that's used for a vacation. Many people associate personal loans with serious things like buying a car or consolidating debt, but they can be used for almost any reason, including vacation financing. 

How does a vacation loan work?

Since a vacation loan is a type of personal loan, it shares the same basic features. For one, it’s typically an unsecured loan. With unsecured loans, you do not put up any collateral, such as your house or car.

These also tend to be fixed-rate loans, so the interest rate won't change from the time you take out the loan. This makes the rate of accruing interest predictable. These loans also are made for a fixed amount of time, meaning that you have a set number of months or years to pay back your loan. This is also known as the loan term.

Essentially you know your loan amount, interest rate and length of time it will take you to repay your loan. So, your monthly payment should be stable and predictable.

How can I qualify for a vacation loan?

  1. You’ve selected your destination, and your budget is set. Now it’s time to figure out how to finance your dream vacation. Many financial institutions offer vacation loans, including banks, credit unions and online lenders. That means you can check multiple lenders to find the right fit.

  2. Just as with any personal loan, you will need to fill out an application. However, you might consider looking for lenders who will allow you to prequalify first. That process shouldn't affect your credit score the way a full application would. Either way, the lender will generally ask you to supply basic financial information, such as your income, assets, and debts.

  3. Lenders will look at your credit score and debt-to-income ratio (what you earn compared to your current debt.) With a good credit score, solid credit history and low debt-to-income ratio, you’re relatively likely to be approved for a vacation loan. You can request a free credit score before you start looking to see if there is anything there that is detracting from your good credit score. But even with only fair credit, you may still qualify for a vacation loan, although likely with higher rates.

  1. First, figure out how much your loan amount should be. Factor in all items, not just the big-ticket ones like plane tickets and hotels. These might include trip insurance, souvenirs, taxi rides, food, tips, excursions and tickets for events.

  2. Try to get as close as possible. Borrowing too little will leave you with less desirable options. You might be stuck using credit cards with high interest rates or not doing everything you’d planned for your dream vacation. Borrowing too much could leave you with higher monthly payments and the temptation to spend on things unnecessarily. Other costs might include a higher loan origination fee and having to pay interest on the higher loan amount.

Compare what lenders offer for vacation loans

Terms for personal loans vary widely. It’s a good idea to check multiple lenders to see what they offer. Do they require a minimum loan amount? Do they charge an origination fee? What about other loan terms?

Lenders can vary greatly, however, on loan payment terms, including interest rates, loan closing costs and prepayment fees. So be sure to read the loan agreement carefully. Don’t be in a rush. Call lenders to ask questions if anything about the loan terms and conditions is unclear. Here’s some of what you’ll be considering:

  1. Prequalification  
    Before you and a financial institution make a mutual loan commitment, see if the lender offers prequalification. This means that a lender will make an initial determination about whether you qualify. Prequalification is not binding on you or the bank, and it does not affect your credit score. It’s like being prequalified for a credit card; credit approval isn’t final until after formal inquiry into your credit history. At that point, your credit score may be affected slightly as a financial institution makes a “hard inquiry” into your credit.

    Because prequalification is unlikely to affect your credit score, it’s a great way to compare loans before moving to the next step. Of course, it's important to be honest throughout this process, particularly about income and debt payment obligations.

  2. Fees
    Many loans include fees, including application fees and loan origination fees. However, TD Bank does not charge such fees. You may find that beneficial.

  3. Interest rates
    The total cost of the loan could differ by hundreds or thousands of dollars depending upon the lender and its interest rate. Pay close attention to this loan term.

  1. Prepayment penalties
    Some lenders charge this fee because they expect to receive the full amount of interest charges over the life of the loan. The penalty discourages borrowers from paying off early and makes up for interest charges the lender might lose. If a lender's minimum loan amount is higher than you need, it's vital to know whether a prepayment penalty will keep you from paying back the excess immediately.

  2. How fast can they approve the loan and get you the money?
    Some lenders can approve loans quickly and get you the funds within one business day. Others might take more time for approval and even longer to get the money to your bank account. Because these loans are unsecured personal loans, many lenders take time to perform their due diligence.

  3. Mobile app features
    After you get your loan, you might want to track it and your repayment progress or make payments through an app. Look for a lender with a user-friendly app for easily figuring out how much you still owe with a few taps. You might consider the TD Bank app if you're applying for its personal loan.

Apply to your top choice

Once you’ve been prequalified, evaluated the terms and conditions and compared fees and features, determine the best lender for you. Then it’s time to formally apply for your loan. Online lenders try to make it as easy as possible to apply and tout their quick response times. Some people feel more comfortable going into a bank or credit union to talk to someone and apply in person. If you choose the latter, make sure you check ahead to know whether you will need to bring any documents.

If you don’t get approved, move on to your second choice. Just because one lender does not approve your application doesn’t mean another one won’t.

What are the alternatives?

There is something to be said for vacation loans, but there are alternatives. Here's a look at some of them:

  1. Saving for your trip. If you save ahead, you can avoid interest charges. One way to do it is to set up a separate savings account just for your vacation fund and don’t touch that money until you are ready to go on a trip.

  2. Credit cards. Some circumstances might make this choice particularly attractive. Travel reward credit cards sometimes offer desirable benefits, and cardholders pride themselves on using them well and getting deals. Some credit cards offer 0% interest for an introductory period when you open a new account. Just take into account what the interest rate will be when that period ends. It often is 18 months. Will you be able to afford the monthly payments then?

  1. Creative combination. People with travel reward credit cards might consider using them to earn perks like triple points on travel-related expenses, access to airport lounges, discounts on hotels and more. Then, they could pay off the balance with a personal loan. At that point, it would technically be a debt consolidation loan rather than a vacation loan. However, if you can get a better interest rate and terms with a personal loan than that credit card, the benefits are there.

  2. “Buy now, pay later” loans. Also known as point-of-sale loans. With these, consumers typically sign up for a payment plan when booking a vacation. This is an attractive option for some travelers, as they take care of vacation planning and financing all at once. Interest rates for these types of loans can often be higher than either vacation loans or credit cards. If something goes wrong, it can be a big headache dealing with two separate entities, the lender and the travel provider. Each may want the other to handle the problem, leaving you in the middle.

Bon voyage!

Let a good financial decision be a positive part of a memorable trip. For some people, a vacation loan is a good financing choice. And if you're traveling internationally, TD Bank has tips to help make your vacation run smoothly.

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This article is based on information available in March 2023. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available. For specific advice about your unique circumstances, consider talking with a qualified professional.

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