What Are Vacation Loans & How Do They Work?

Q: Is a vacation loan a good idea?

A vacation loan can be a good idea if you can afford to repay the loan in full. As mentioned earlier, repaying the loan in full could improve your credit score. A vacation loan, however, would be a bad idea if you cannot afford the impact it would have on your debt-to-income ratio.

Q: Do banks give loans for vacations?

Banks give personal loans for vacations. Some banks may offer personal loans in the amount of $3,000 to $100,000 and repayment terms ranging from 12 months to seven years on a fixed rate of interest. Credit unions and nonbank financial institutions also offer loans for vacations.

Q: Are vacation loans cheaper than paying outright?

The total repayment cost of a vacation loan is typically more costly than paying outright. That’s because lenders usually charge interest on personal loans for vacation. Vacation loans can also feature origination fees and application fees, but dipping into your savings and paying for your vacation outright may incur no fees or interest charges.

What Are Vacation Loans & How Do They Work?

Sulaiman Abdur-Rahman

Updated March 4, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Vacation loans are personal loans that help borrowers pay for the costs of a getaway. Vacation loans provide you with a lump sum of money that you may spend on anything related to a vacation.Vacation loans can provide you with opportunities to travel far and wide. Personal loans for vacation can also cover any expenses related to a road trip or sightseeing journey, including lodging and dining.A vacation loan may include flexible terms and predictable monthly payments. Below we provide more details about vacation loans and explain their pros and cons.

What Are Vacation Loans?

As mentioned above, vacation loans are personal loans providing you with a lump sum of money that you can spend on anything related to a vacation. Borrowers can use vacation loans to pay for plane tickets, car rentals, hotel expenses, and visiting major attractions.Banks, credit unions, and nonbank financial institutions may offer personal loans for vacation. These vacation loans can feature flexible repayment terms and predictable monthly payments.

How Do Vacation Loans Work?

Vacation loans work by providing borrowers with a lump sum of money. The borrower can use that money to help cover any expenses related to a vacation, including travel, lodging, sightseeing, and dining.Borrowers can repay a vacation loan under the terms and conditions of a loan agreement. For example, a $5,000 personal loan for vacation may feature a repayment term of two years and a fixed rate of interest. Borrowers in that case could repay the loan with 24 fixed monthly payments covering the principal and any interest charges and fees.

Are Vacation Loans a Type of Personal Loan?

As mentioned above, vacation loans are personal loans that help borrowers pay for the costs of a getaway, road trip, or sightseeing journey. Personal loans for vacation can be secured with collateral or unsecured.Unsecured personal loans do not require borrowers to pledge collateral, whereas secured personal loans require borrowers to offer an asset or personal property as collateral. Some lenders, for example, may require borrowers to pledge a vehicle as collateral on large loan amounts of $20,000 or greater.A reason to consider a personal loan is it can help you cover personal expenses, such as financing a road trip or dream vacation.

Typical Vacation Loan Terms

Here are typical vacation loan terms:

Principal Amount

The principal amount on a vacation loan refers to the amount of money you borrow. This is the lump sum of money the borrower receives in one fell swoop. Borrowers are expected to repay the principal amount in full by the end of the loan’s term.

Interest Rate

The interest rate on a vacation loan is the amount that a lender charges a borrower for taking out the loan. Lenders can offer a fixed rate that never changes or variable rates of interest that may fluctuate over the life of the loan. Interest rates are typically expressed as an annual percentage of the loan balance.

Repayment Term

The repayment term on a vacation loan refers to the length of time a borrower has to repay the principal and interest charges in full. Some lenders may offer personal loans for vacation with terms as short as 12 months and as long as seven years.

Pros and Cons of Vacation Loans

Here are some pros and cons of vacation loans:

Saving Up for a Vacation vs Taking Out a Loan

Saving up for a vacation could be cheaper than taking out a personal loan to finance the cost of vacationing. Vacation loans can include high rates of interest and may require borrowers to pledge collateral.When considering what affects your credit score, applying for a vacation loan may cause your credit score to drop a few points if the lender conducts a hard pull inquiry into your credit report. Although repaying the loan in full could improve your credit score, defaulting on a vacation loan could leave you with damaged and subprime credit.Lenders may seize your collateral if you default on a secured vacation loan. Having what is a bad credit score could also make it more difficult for you to borrow money in the future.

Finding and Applying for a Vacation Loan

Here is how you may find and apply for a vacation loan:

Compare Rates

You may explore personal loan offers as a prequalified or preapproved consumer, which can allow you to compare personal loan rates of interest and apply in minutes with a lender of your choice.

Compare Total Costs

You can search across lenders and compare total costs of personal loans for vacation. Total costs can include principal, interest, origination fees, and application fees.

Check Requirements

You may check the application requirements of any personal loan for vacation before applying. Lenders may require applicants to submit proof of income, proof of residence, and proof of identity. Some lenders may also require collateral.

Alternatives to Vacation Loans

Here are some alternatives to vacation loans:

Personal Lines of Credit

Borrowers may use personal lines of credit to finance a dream vacation. Personal lines of credit allow borrowers to withdraw funds up to a set limit for personal spending. Personal lines of credit are revolving credit accounts allowing account holders to make minimum monthly repayments or greater.

Credit Cards

Borrowers may use credit cards to finance a dream vacation. Credit cards are a revolving line of credit allowing cardholders to make transactions up to the card’s credit limit. Consumers with good credit scores above 670 may qualify for credit cards offering 0% interest on purchases for a 21-month promotional period.

Point-of-Sale Travel Financing

Borrowers may consider point-of-sale travel financing to help pay for vacation-related expenses, such as the cost of transportation and lodging. Travel websites may offer point-of-sale loans allowing you to book your vacation now and pay later. Some lenders may offer point-of-sale travel financing with 0% interest.

Local Vacation or Staycation

Consumers may consider a local vacation or staycation that can allow for local sightseeing and leisure without incurring large expenses for travel and lodging. A staycation can allow you to sleep at home during the night and explore local attractions during the day.

Creating a Travel Budget

Creating a travel budget may help you plan a dream vacation that you can finance within your means. A travel budget can take into account your savings and expected future income. Your travel budget can also establish a framework on how much you intend to spend on each aspect of your planned vacation.

The Takeaway

Going on a cruise, taking a long road trip, or flying to extravagant destinations as a tourist can cost hundreds or thousands of dollars. Financing such a getaway could increase your burden of debt but also provide you with opportunities to experience new adventures.Lantern by SoFi can help you compare personal loan options that may help you pay for the cost of a dream vacation. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice.

Photo credit: iStock/kate_sept2004The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SoFi Loan Products SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636. For additional product-specific legal and licensing information, see SoFi.com/legal.SOLC1221081

Frequently Asked Questions

Is a vacation loan a good idea?

Do banks give loans for vacations?

Are vacation loans cheaper than paying outright?

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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