4 Reasons Financing a Vacation Is a Bad Idea

Financing a vacation is an appealing concept emotionally and a bad idea economically. In general, those who need to finance a vacation will face high costs of borrowing, get nothing lasting in return, owe long after the vacation is over and possibly harm their credit. Consider the following four reasons not to borrow for your next vacation.

1. Interest Expense Increases Vacation Cost

Few people borrow if they don't need to. If you have stellar credit and can qualify for an unsecured loan at market rates, it is unlikely you would need to borrow the money for a vacation. Instead, you could fund the vacation out of savings.

People who need to borrow the $1,000 to $1,500 for a vacation often will be looking to payday-type lenders. These lenders will offer only secured loans--meaning you must put up the cash equivalent of the loan to get it--and the loans very likely will come with a high interest rate and tough terms. Late payments will cause the interest rate to skyrocket, and late fees will apply.

Even if you pay on time, you have added significantly to the cost of the vacation with interest. Many people, if they simply must have a break from their routines, take "stay-cations" instead, doing something fun near home.

2. Limited Return for the Cost of Borrowing

The best kind of borrowing to do is borrowing that builds equity. Borrowing for a home builds ownership in the home. Under the right conditions, the equity in the house eventually will top the total cost of purchase and financing.

Another legitimate use of borrowing is to finance needed purchases that exceed current cash reserves. Today, most people must have a car, and many need a nice car for work. Although the borrower is not building equity, there is significant value for the borrowed funds.

People get into financial trouble when personal cash flow meets needs but not all wants and they borrow to finance wants. This type of living beyond one's means is financially imprudent. By any definition, a vacation is something nice to have, not a must have. Financing such wants can quickly get the borrower in over his or her head.

3. Costs Continue after the Vacation

A vacation can provide fun, relaxation and memories. All of these can be important. However, a financed vacation provides those and adds the burden of having to continue paying for it long after it is over. The benefits of a vacation can be had without financing it by reducing the cost of the vacation to what you can afford or taking time off at home.

4. It Could Hurt Your Credit

Not repaying loans on time can hurt your credit score. However, even if you always pay on time, unnecessary borrowing can lower your score as well. The credit scoring agency looks at the amount of credit your personal financial circumstances should be able to afford you. The closer you are to maxing out available credit, the more it can lower your score.

Financing a vacation can seem like a good idea at first, but it's a bad idea because you add significantly to the cost and get very little in return that you couldn't get without borrowing.

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