Tips and Advice

Making a Travel Loan Work for You

Could a loan make your vacation trip more affordable? Borrowing for travel can have its risks, but find out how to make a travel loan work in your favor.
A child and mother sit in an airplane getting ready to leave for vacation
By Richard Barrington
Updated on: November 11th, 2022

Travel can be an expensive proposition and may require significant upfront investment. So finding the best travel loan can be as much a part of your vacation plans as picking a hotel and finding the best flight.

While there can be drawbacks to borrowing money for travel, with careful planning you can make it work for you. If you plan ahead, you can actually save money by financing your travel.

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Should you borrow money for travel?

Does it makes sense to borrow money for travel? Financial experts often advise against taking on a long-term financial obligation for a short-term purchase like travel. After all, you don’t want to be making five years of payments for a two-week vacation.

Even so, you can limit the long-term costs while obtaining some financial benefit. For example, many hotels and airlines offer substantial discounts if you are willing to pay in advance.  And cruise lines often discount up to 50% if you book and pay a year out.

To a lesser extent, credit card reward programs could somewhat defray the cost of borrowing. Cash back programs are the most versatile. And while these often only pay you back 1%, some pay 5% for certain types of spending. If you can get 5% cash back on your travel costs, and receive a discount for paying in advance, the savings could offset the cost of a travel loan. And then some.

To maximize your savings, structure your debt in a way that limits the cost.

Related: What Credit Score Do You Need for a Personal Loan?

Personal loans for travel

While simply reaching for a credit card to pay for a hotel bill may be the easiest way to finance travel, personal loans might be a better option.

For one thing, personal loan interest rates are generally well below credit card rates. As of this writing, the average rate charged on credit card balances was 16.91%, according to the Federal Reserve.  While the average interest rate on a personal loan was 10.36%. In other words, you can cut your interest expense by more than a third by using personal loans for travel rather than credit cards.

Another advantage travel loans have over credit card debt is their fixed interest rate and defined repayment term. That way you know what you are getting into — what your monthly payments will be and how long it will take to pay off the debt.

The structured nature of travel loans works best if you limit the time frame of the loan. For example, if you take a big trip once a year it makes sense to keep your loan term to one year or less. That way, you pay off your first trip before it’s time for the next one. In fact, if you get a loan early so you can qualify for advance reservation discounts, you can actually have a substantial portion of that loan paid off before you leave home.

Credit cards and travel loans can work together

While travel loans may have rate and structural advantages over credit cards, the best way to finance travel may involve using credit cards in tandem with a travel loan.

If you have a strong rewards card, make your upfront payments for travel with the credit card to qualify for the rewards. Then use a travel loan to pay off the credit card. That should get you a lower interest rate and a preset repayment term.

This approach works best if you have your travel loan lined up in advance. So you know you can pay off the card balance before you start racking up interest. Also, lining up the loan in advance will give you time to shop for the best terms on a travel loan. This can save you a substantial amount in interest and fees.

Like most financial tools, a travel loan is neither inherently good nor bad. It all comes down to how you use it. Used wisely, a travel loan may be the best way to finance travel. Knowing that could be the first step towards a happy and carefree trip.

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