Can Taking Out A Personal Loan To Fund A Vacation Ever Be A Wise Financial Plan?

If you're like many Americans, you may feel as though you're too busy with work and family obligations to spend as much time traveling as you'd wish. Travel budgets can also be a concern, especially for those under a time crunch -- purchasing non-stop plane tickets and other perks to help minimize the amount of time you spend in transit can add up over the course of a vacation. Fortunately, there may be an alternative to placing the cost of your next vacation on your credit card or taking out a payday loan. Read on to learn more about obtaining a personal loan for vacation spending, as well as some factors you'll want to consider before applying for a loan or line of credit.

Can you get a personal loan to fund your vacation plans?

Personal loans are a type of unsecured loan -- meaning they aren't secured with collateral, like a mortgage (secured by the home) or an auto loan (secured by the car). A personal loan is guaranteed only by your signature, giving the lender the right to seek a personal judgment against you if you default on this loan. This judgment can be enforced through wage or asset garnishments or other legal proceedings. 

Because personal loans are unsecured, they are considered a higher risk (for the lender) than secured loans, and often carry a higher interest rate. However, with nationwide interest rates still hovering near their all-time lows, today's personal loan is often cheaper capital than a mortgage taken out as recently as the early 2000s, and the interest rate on your personal loan should be significantly lower than the rate offered by another source of unsecured credit like a credit card or payday loan. 

One of the advantages of a personal loan, much like a credit card, is that you're not required to use the funds for any specific purpose. Although you can take out a personal loan to pay medical bills or fund home renovations, you can also seek one to help pay for your dream vacation or even cosmetic surgery. As long as you have a steady source of income and a favorable debt-to-income ratio, you should be able to qualify for a personal loan at a local or national bank. 

Another advantage specific to personal loans is the relative lack of impact on your credit score. Although your score may suffer for a month or two following the lender's credit inquiry, the amount of your loan won't affect your credit utilization ratio, which can have a major effect on your score if it rises above 30 percent of your total available credit. 

What should you consider before taking out a personal loan?

Chief among the questions you'll need to ask yourself before taking out this loan is "can I afford to repay it?" Personal loans can offer lower interest rates and more flexible terms than most credit cards, but will also generally require a fixed monthly payment of a percentage of the total balance (rather than the lower "minimum payment" assessed on credit card purchases). Ensuring that your household has adequate cash flow to repay this loan without letting other obligations slide is paramount, as a failure to repay your loan per the agreed-upon schedule could tank your credit score or even land you in civil court. 

You'll also want to carefully look at your proposed loan type to determine whether a fixed-rate or adjustable-rate loan would be the best choice for your situation. Many personal loans are fixed-rate, meaning that the interest rate cannot be changed for the life of the loan. On a fixed-rate loan, you'll be able to accurately calculate your monthly payment amounts and even the amount you'll have paid at the end of the loan period before even applying for the loan.

Adjustable-rate personal loans can be riskier, at least in situations where you may not have access to the cash to pay off this loan ahead of schedule. Adjustable-rate loans permit the periodic adjustment of the loan's interest rate to keep it in line with trends in national interest rates, potentially raising or lowering your monthly payment with each adjustment. Although interest rates are currently quite low, if these rates rise in the future, you could find yourself paying a higher monthly amount or even having your repayment schedule extended if this loan becomes unaffordable. 

For more information, options, and advice as you're trying to plan out your finances and vacation time, talk with a professional financial planner, such as those at Global Wealth Consultants LLC.