Ask Penny: Should I get vacation financing to take my dream trip?

Hi Penny — now that I’m fully COVID-19 vaccinated, I can’t wait to take that dream vacation I’ve been putting off. What are my options for vacation financing? I want to splurge, but the past year was tough and I want to make sure I’m responsible. — Vaxxed & Ready to Travel

Hey Vaxxed & Ready to Travel,

Congrats on getting your shot(s)! I can feel your excitement to get back out there and I know that travel attractions will be thrilled to welcome you, especially after the staggering losses they’ve experienced amid the pandemic.

Before planning any travel, make sure to check the latest guidelines from the U.S. Centers for Disease Control and Prevention to help reduce the chances of disruption and unforeseen costs.

With health logistics out of the way, let’s talk about the financial considerations you’ll want to think through before you hit “book” and make your dream vacation a reality.

Think twice before getting vacation financing

It may seem harmless to borrow money for a trip, especially after you’ve been cooped up for so long. But if the pandemic taught us anything, it’s that life can change in an instant. So even if you’ve done the math and you’ve got the budget to pay for your dream vacation, keep in mind these potential pitfalls that can make things more challenging for you.

For starters, using a credit card to finance your trip might expose you to high interest rates — my friends at the Federal Reserve peg the average credit card interest rate at 14.75% as of the first quarter of 2021. What’s more, credit cards don’t have set repayment terms like installment loans. So if you make just the minimum payment, it can cost you more and keep you in debt longer.

If you decide to take out a personal loan instead, the terms could be somewhat better. The average interest rate on a two-year personal loan was 9.46% in the first quarter of 2021, according to the Federal Reserve. With a personal loan, you can manage a predetermined repayment period. But if you have plans to borrow money to travel more than once over the next couple of years, that balance can quickly snowball as you take on more debt before you pay off what you already owe.

Even if you can afford to repay the debt, a personal loan or credit card payment could make it difficult for you to work toward other financial goals. For example, you may want to build a robust emergency fund, pay off debt, or save for retirement or a down payment for a home. Consider how a monthly payment could affect your overall financial health in the short and long term.

Consider the costs of using ‘buy now, pay later’ for vacation financing

“Buy now, pay later” services are a popular way to shop for goods and services, but they can be just as costly as traditional vacation financing options — or even more so. For example, Affirm offers financing with select travel websites, with some interest rates as low as 0%. But on the high end, you could end up with a 30% APR.

Other “buy now, pay later” platforms like PayPal’s Pay in 4, Sezzle and Afterpay may allow you to spread out the cost of travel with certain merchants over time without interest. But you typically need to repay the full amount over the course of six weeks. And if you can afford to do that, it may be best to just wait until you have enough cash in hand to make your purchase.

Some credit card companies like offer programs in which you can put certain purchases on a set repayment plan with fixed monthly payments. While you won’t be charged interest, you might have to pay a monthly fee that can vary based on a number of factors.

You’ll also want to think about travel costs beyond the flight, hotel and rental car. For example, it’s a good idea to buy some travel insurance, especially because the pandemic is ongoing and travel restrictions can change. Additionally, the cost of food, event tickets, safety protocols and other travel expenses can add up fast.

How to keep that dream vacation from turning into a debt nightmare

Ultimately, it’s up to you to decide whether to finance your vacation. But if you’re aiming to safely enjoy yourself without racking up a pile of debt, here are some pro tips to consider.

• Set a savings goal: Think about when you want to travel and figure out how much it will cost. Then set a savings goal for that amount and divide it by the number of months you have until your travel date. For example, if the trip is eight months from now and will cost $3,000, you’ll need to save $375 per month until then. And remember, you’ll likely need the money before your travel dates because it’s best to book flights and hotels in advance.
• If you’re going to use credit, apply for a card with travel rewards: Many travel credit cards offer big introductory bonuses that you may be able to use to help pay for your travel — some are worth hundreds of dollars. In most cases, you’ll need to meet a spending requirement to earn the bonus, so you’ll want to plan in advance. But with some cards you can book your trip even before you earn the bonus, then once you get the miles, use them to get a statement credit for your previous travel purchases.
• Be flexible with your plans: As more people get vaccinated, more activities seem to open up. To say the last year or so has been rough is the understatement of the century. So I wouldn’t blame you if you wanted to travel sooner rather than later. That said, it’s a good idea to be flexible with your travel dates. Depending on where you want to go, some months are cheaper for travel than others. And when it comes to flights and hotels, prices can change frequently, so if you wait, you could find a deal.
• Look for other ways to make some money: If you’re worried about being able to travel on your current salary and you have some free time, consider looking for opportunities to make some extra cash that you can put toward your vacation fund. Make sure you’re comfortable with your choices, though. For example, rideshare services like Uber and Lyft may be worth considering. But if you’re not sure about being in close quarters with strangers right now, you might consider restaurant delivery instead. Consider this and other ways to make money to achieve your goal.

Good luck with your travel plans! I hope this helps you find the right balance between your trip aspirations and your financial well-being.