What is a holiday loan? What are the benefits and risks? And should you pay for your next holiday with a loan?
What is a holiday loan?
A holiday loan is a personal loan you take out to pay for a holiday. Typically you can ask to borrow between £1,000 and £25,000. The loan is unsecured, so you won’t need to put your home at risk to get one.
Can I use a holiday loan for any holiday?
Pretty much. The one potential exception is where you plan to go travelling for an extended period. You’ll need to be able to make your monthly repayments as they become due so you will want to ensure you can either delay the start of repayments (some loans offer a deferred repayment of a few months) or be able to meet your obligations whilst you’re away.
Benefits of holiday loans
- You get to have the holiday you want now, rather than waiting and saving.
- Payments are fixed, so you always know how much you’ll need to pay each month.
- You can set the term of the loan to meet your needs. Pay over a longer period and you’ll pay less each month but more in interest over the long run. Over a shorter loan period you’ll pay less interest but more each month.
- Spend it like cash – once the loan money is in your account, you’re free to use it as you wish, whether that’s to pay for the flights and hotel, book excursions or use as spending money.
- You may be able to take a payment holiday, giving you a bit of breathing space between the end of your holiday and the start of repayments.
Disadvantages of holiday loans
- It’s a debt and you will need to repay it.
- If your credit rating is poor your holiday loan application may not be accepted – or you may not be able to take advantage of low interest rates.
Will I qualify for a holiday loan in the UK?
The application process is just the same as with any other personal loan. There’ll be a credit check, so if you’re planning on making a holiday loan application soon, it’s worth taking a look at your credit rating a few months ahead of your application and doing what you can to ensure it’s as good as it possibly can be. The better your rating the greater the likelihood your application will be approved and the greater the chance you’ll secure a low interest rate.
What does a loan for a holiday cost?
The amount you pay back each month is made up of the following elements:
- Loan amount: Naturally, you’ll need to pay back what you borrow.
- Interest: The interest rate is the key figure to check when shopping around. The lower the rate, the less interest will be added to your loan. That’s particularly valuable if you’re planning to pay the loan back over a longer term.
- Fees and charges: Check the small print to see if there are any setup fees or early repayment charges. They may not be large enough to make the loan a bad deal, but you’ll want to know about them in advance.
In addition to the amount you borrow and the interest rate, your repayments will be influenced by:
- The loan term – the longer you pay, the more you’ll pay in interest but the smaller each monthly payment will be – and;
- Your credit rating – because the better your rating, the lower the interest.
Should I pay for a holiday by credit card?
For many, the obvious alternative to paying for a holiday using a loan is to pay for it by credit card. Putting some of the cost of the holiday on your card could be a wise move but paying for it all by credit card may not be. Here’s why:
- Should I use my credit card to pay all my holiday costs? If the card’s not interest-free, probably not. Chances are the interest rate you’ll pay on the card will be higher (and sometimes far higher) than the interest you’ll pay with a holiday loan.
- What if it’s an interest-free credit card? If you have a 0% credit card, it’s then a question of how quickly you’ll be able to pay off your holiday. Most 0% credit cards are time limited, that is, the 0% stops after 6 months or 2 years, and at that point the interest rate shoots up. So if you can clear the balance before that happens a 0% credit card may be the better option. If not, consider a loan.
- Should I pay some of the balance using my credit card? If you pay for a holiday costing between £100 and £30,000 using a credit card – even if you pay only £100 of the balance via credit card and the rest by loan – you’ll be given some valuable additional protection under the Consumer Credit Act which could help you get money back if things go wrong. It’s important to note that the protection doesn’t take the place of travel insurance, nor is the protection likely to help you if you book with an ATOL protected travel agent – because you’ll use the ATOL protection instead. But if you’re shopping around and booking flights and hotels separately, paying at least £100 by credit card could prove a very wise move.
Other alternatives to a holiday loan
If you don’t want to take out a loan or build up your credit card debt, how else might you afford your holiday?
- Save up: The cheapest way to pay for your holiday. Unfortunately, it also means waiting for your holiday.
- Use your overdraft: Whilst this may have been a reasonable option in the past, changes to the way banks charge for overdrafts will make this a very expensive way to borrow money in the coming months. Interest rates are set to double to around 40% and, although the increase was delayed by coronavirus, it’s imminent.
- Holiday company deals: The tourism industry has been ravaged by the pandemic, so there could be some impressive package deals around (providing there’s an airline industry left to fly you there). Always check the detail though. Even a 0% deal can work out more expensive if the package price is higher than you can find by organising the holiday yourself.
How do I apply for a holiday loan?
Online is the quickest and easiest way to compare loan rates and apply. Typically, lenders will require you to:
- Be over 18
- Have lived in the UK for a certain length of time
- Have a debit card
- Have two forms of ID, one of which must be photo ID (e.g. passport or driving licence)
Should I take out a holiday loan?
As we’ve seen above, it will almost always be cheaper to save up the money first rather than pay off a loan plus interest, but sometimes timing matters and you can’t afford to wait. A brilliant holiday deal now could be cheaper (even with interest added) than the price you’ll pay later. There may be a pressing reason why you need to travel now – perhaps it’s your honeymoon or you’re rolling up a holiday with attending an overseas wedding. And if you’d always planned to take the kids on a big Florida theme park adventure, every year you spend saving will be a year they grow older.
So a holiday loan can be a really effective way of booking the holiday of your dreams without a nightmare of a wait. Just follow these three golden rules to ensure you find the right loan for you:
- Consider alternatives: Could you borrow the money elsewhere at a lower rate?
- Shop around: There are lots of holiday loans available, so find the one that’s right for you and read the small print
- Borrow affordably: There’s no point falling into problem debt for the sake of two weeks’ sunshine. Set a budget for monthly repayments that you can manage comfortably and stick to it
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