Should you take out a loan to pay for your next holiday?
Dreaming of a holiday in the sun? A personal loan could be one way to pay for your next trip.
We’ve all been waiting a really long time to be able to get away from the UK. So, whether it’s a sunny beach, a round-the-world trip, or something closer to home, if you don’t have the savings to pay for your next trip, a personal loan is one option you could consider.
Taking out a holiday loan is one way to afford a holiday, although it's not an option for everyone and there can be expensive fees to pay.
Here we look at everything you need to know about taking out a holiday loan, from how to apply and the eligibility criteria to the pros and cons and best alternatives.
What type of loan is a holiday loan?
A holiday loan does what it says on the tin. It’s an unsecured personal loan, and you can use the money to pay for your next holiday. Some loans may be advertised as holiday loans, but they are essentially personal loans which can be used for most things, including a holiday.
You agree to the amount of money you want to borrow. If you’re accepted for the loan, you’ll receive the money - usually the next day - and you’ll then have to pay it back over a pre-agreed timeframe.
Where can you get financing for a holiday
Many high street and supermarket banks offer personal loans, which may or may not be promoted as holiday loans. The amount you can borrow will depend on the lender but you can usually apply for up to £25,000, although the exact amount available will depend upon your credit score and the lender.
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How a holiday loan works
If you’re planning to take out a holiday loan, you’ll first need to decide how much you need to borrow. There are lots of providers around, and it’s worth taking the time to find a loan that works for you and one you can afford to repay.
When you apply for the loan, you’ll need to give the lender certain details about your finances, including your income and outgoings. The lender will want to look at these to see if you’ll be able to afford to pay back the loan in the time frame agreed.
The lender will also look at your credit score when deciding whether to give you the loan, and at what rate of interest it will charge you. This will leave a mark on your credit score even if the loan isn’t approved. Therefore, it’s worth using a free eligibility checker first - which won’t affect your credit score - to give you an idea of the loans that might accept your application.
How much you can borrow for a holiday loan
The amount you can borrow will depend upon the lender and your credit score, with the largest loan amounts reserved for those with the best credit scores. As a guide, personal loans typically go up to £25,000 - more than enough for most holidays.
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Pros and cons of a holiday loan
Before applying for a holiday loan, make sure you’re aware of the pros and cons.
Pros of a holiday loan
- It can be a cheap way to borrow money if accepted.
- Repayments are typically fixed, so you’ll know exactly how much you’re paying back.
- The money is usually paid into your bank account the next day after the loan is approved.
- You can pay the loan back early (although there may be a fee for doing so).
Cons of a holiday loan
- By taking out a loan to pay for a holiday, you’re taking on debt which you will be repaying for long after your trip ends.
- Only those with excellent credit scores are accepted for the lowest interest rates.
- If you’re not able to repay the loan, you will be hit with fees and your credit record will be damaged. Your lender will also take action to recover the debt.
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Alternatives to a holiday loan
Holiday loans are just one way to pay for a trip if you don’t have savings to fund it, and there are several alternatives to consider.
- Cutting back on your holiday budget
Before you take on debt to pay for a holiday, consider scaling back your budget or changing your plans. If you’re not happy to take out a loan and are worried about repaying it, it’s better to put off your dream holiday until you’ve saved enough to pay for it.
- Using a 0% purchase credit card
If you use a 0% purchase credit card, you won’t pay any interest on the money borrowed for a set period of time, sometimes up to two years. This can be a cheap way to borrow money but only if you’re able to repay it during the 0% period.
- Borrowing from a peer-to-peer lender
Peer-to-peer lenders are relatively new to the market but they are often an alternative for those who aren’t able to get a loan from a mainstream lender. Loans taken out through this method will typically come with higher rates of interest.
What happens to my loan if my holiday is cancelled?
If your holiday is cancelled - something which has happened a lot in the past year - you’ll still need to pay back a holiday loan in full. You may be able to claim back money via your travel insurance if the trip is cancelled and you’ll also get an extra layer of protection if you use a credit card to pay for it, under the consumer credit act.
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Image source: Getty Images
Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more