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The Pros and Cons of Vacation Loans

19 August, 2011



Vacation loans are personal loans designed to help you pay for a vacation for you and your family. With the economy still struggling to overcome recession and rising fuel prices, vacations have become harder to afford than before. Vacation loans offer you a great deal of flexibility and a few other useful features, but they also come with several potential drawbacks that can leave you in a financial bind. That is not to say that you shouldn’t get a vacation loan–you just have to make sure you know what you’re getting into.

Flexibility of Use

One of the biggest advantages of having a vacation loan is that you can use it for anything you want. Whether you want to buy tickets, reserve rooms in a hotel or charter a boat for an evening, the lender won’t care so long as you repay it on time. Just make sure you don’t get carried away. Once you spend the entire loan, that’s it–you will have to pay the rest out of your own pocket.

Fixed Interest Rates

Vacation loans have fixed interest rates. This means that the interest rates will remain constant until the loan is repaid, so you’ll never have to wonder how much you have to pay each month. The interest rates are inversely proportional to your credit rating. This means that the worse your credit rating is, the more you will have to pay. Before you agree to take out a vacation loan, be sure to check its interest rate–that way, you’ll be able to judge whether you’ll be able to pay it every month. 

Duration

The vacation loan lenders are often willing to be flexible when it comes to the repayment period, letting you choose its overall duration. It can be anywhere from 12 to 60 months. The longer the repayment period lasts, the smaller the monthly payments will be. However, the longer the repayment period is, the bigger the interest rates will be, so taking longer to make payments may actually wind up costing you more money in the long run.

Vacation Loans and (Lack of) Security

Like all personal loans, vacation loans are unsecured. This means that the personal loan lenders don’t use any of your assets as collateral. With secured loans, if you fall behind on payments, lenders can seize your car, your house or whatever you have put down as collateral. The only way the lender of a vacation loan can recover the money is to sue you. Given the expenses involved in legal proceedings, this is not something a vacation loan lender would necessarily be willing to do.

However, because the vacation loans are unsecured, lenders have be more careful about whom they lend their money to than they would with other types of loans. In order to reduce risk, the lenders will raise the credit requirement, limit how much money you can borrow or do some combination of both.

Vacation Loan Totals

Vacation loan lenders will offer to let you borrow as much as $50,000. However, just because that is offered doesn’t mean you are actually eligible for it. As mentioned above, the vacation loan lenders often limit how much you can borrow based on your credit score. If your credit score is low, you may be able to borrow only $1,000. While it’s possible to vacation for a thousand dollars, you probably wouldn’t get the kind of vacation you were thinking of when you decided to look for a vacation loan.

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by Ethan Leak



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