It’s always best to try and pay for holidays through savings, but whether you’re planning your honeymoon, a special-occasion break or a dream trip, this may just not be possible.
Holiday loans are an option if you’re looking to spread the cost of a getaway. This guide details all you need to know about holiday loans and highlights important things to bear in mind.
What is a holiday loan?
One way to borrow money for a holiday is through an unsecured personal loan. You choose how much you want to borrow, then you pay it back over a fixed amount of time, along with interest, in monthly instalments.
The duration of the personal loan (known as its ‘term’) is up to you – periods of one to five years are typical, but loan terms of up to six or seven years are available.
The longer the term, the lower the monthly payments will be. But you’ll be paying interest for longer, so the total amount you pay over the term will be greater.
These loans are called ‘unsecured’ because the debt is not secured against an asset, such as your home. With secured loans, such as a mortgage, the lender could take your asset to recover its money if you miss payments –which is why they are willing to charge lower interest rates on secured lending.
Unsecured personal holiday loans generally allow you to borrow between £1,000 and £25,000.
What are the pros and cons?
Before you take out an unsecured holiday loan, it’s important to weigh up the pros and cons so you’re confident it’s the right option for you. We’ve detailed the main ones below.
Pros
- fixed payments will allow you to budget for the monthly cost
- you can choose how long you’ll need to repay the loan, usually up to five years
- as the funds are paid into your bank account, you have some flexibility on how you spend the money, so can use some to buy foreign currency, rather than being hit with charges for using your credit cards abroad
- you can usually borrow more than a credit card or overdraft will allow
- there are some competitive rates available.
Cons
- you’ll need a good credit score to benefit from the most competitive rates
- you’re likely to be paying for your holiday for quite a while after you’ve returned – so think carefully about whether the trip is worth it
- monthly payments are not flexible so make sure you can afford to pay them
- if you miss a payment, it can affect your credit score, which can impact future financial applications
- as interest is added on, you’ll end up paying more for your holiday overall
- there may be a fee if you wish to pay your holiday loan off early – often one to two months’ interest.
What to consider before applying
Before you apply for a personal holiday loan, check your credit score online. If your credit rating isn’t what you’d like it to be, some ways to improve it include:
- correcting mistakes you notice on your credit report
- making sure you’re on the electoral roll
- paying all bills on time
- spending small amounts regularly on a card and paying them off in full.
Consider how much you actually need to borrow and think realistically about how much you can afford to pay back each month. While it can be tempting to take a loan out over a longer period of time to benefit from lower monthly payments, bear in mind that you’ll end up paying more in interest overall.
Interest rates tend to be higher on smaller loans, so if you’re borrowing less than £7,500, it might be worth considering other options.
Always do your research on what’s available before applying for a loan as rates can vary. And, if you change your mind once you’ve signed your agreement, you have a 14-day cooling off period – but will have to pay any money back that’s already been transferred to you.
What are the alternatives?
Low deposit offers: Many holiday companies have low deposit offers on certain bookings. Deposits can be as little as £25 per person, and you’ll then have a set amount of time to pay the final balance – usually an agreed number of weeks before your departure.
The terms and conditions of when you’ll be expected to pay the balance, and how you need to pay it, vary between companies, so check carefully before you commit.
Some companies will ask you to set up a Direct Debit for payments, some will automatically take payments from the card you paid the deposit with, while others will allow you to pay according to how suits you.
Regarding instalments, there are deals that allow you to pay in as many chunks as you’d like up to your agreed date, while others will set dates for payments. Look out for hidden extra charges too, such as fees for each payment you make.
0% purchase credit card: If you’re borrowing a reasonably small amount, a credit card that charges 0% on your spending for a given number of months may work out cheaper than a personal loan as you’ll be able to borrow for a set amount of time without incurring interest.
However, this is only an attractive option if you’re confident you’ll be able to pay the balance off before interest kicks in, and it isn’t suitable for spending abroad, where you’re likely to be stung with foreign usage charges.
If you pay for a holiday using a credit card, you’ll benefit from protection under Section 75 of the Consumer Credit Act too, if your travel company goes bust for example.
Low-cost overdraft: Some current accounts offer interest-free overdrafts for a set amount of time. If you only need to borrow a small amount and are confident you’ll be able to pay it back before you’re hit with any interest charges, this could be an option.
However, avoid going over your set overdraft amount as charges can be hefty.