During the Ber months (October, November, and December), the chilly weather is accompanied by a sense of holiday anticipation. Millions of Americans are concerned about the impact of inflation on prices as they plan their vacations. However, most people take out a personal loan to pay for holiday expenses if traveling is a high priority for them this year.
Generally, it’s not a smart decision to take out a personal loan to pay for holiday expenses, especially given the current high interest rate climate. Moreover, if holidays or last-minute plans change, you can reduce travel expenses to mitigate financial impact.
Should You Take Out a Personal Loan to Pay for Holiday Expenses
To take out a personal loan to pay for holiday expenses may lead to excessive debt, despite its seemingly obvious nature. Typically, personal loans should be used for business operations or roof repairs, not for holiday expenses or extravagant gifts. This means you are overspending if you have to borrow money to shop for the holidays.
However, everyone has had a difficult year, so it’s acceptable to give your emotional needs some thought. You can consider it if you can pay interest on the loan throughout the holiday season to make it special. If not, consider stretching your money in different ways.
Why You Shouldn’t Take Out a Personal Loan to Pay for Holiday Expenses
A personal loan may not be the best option to pay for travel-related expenses like airfare, lodging, and dining out. The following are reasons why you shouldn’t take out a personal loan to pay for holiday expenses.
Challenges to pay interest rate
A personal loan increases the total amount of debt you have. Adding to your debt with interest is risky and might not be financially feasible. This is applicable if you are already having trouble paying back loans for credit cards, cars, or education.
Increase in DTI
Your debt-to-income ratio (DTI) is the percentage of your monthly income set aside for debt service. This could include credit card payments, additional loans, rent, or a mortgage. Lenders desire a low DTI of 36% or less. As a result, if your costs take a considerable percentage of your income, incurring more debt for a vacation may make future financing difficult.
A new loan might affect credit score
Your credit score may decrease when you take out a personal loan since your lender will perform a hard query on your credit record. Over time, you can improve and establish your credit score by paying your loans on time. However, failure to make timely payments may hinder future credit approvals.
Interest and other loan fees
The Federal Reserve reports that as of May 2022, the average interest rate for a 24-month personal loan was 8.73%. And this number is certain to climb as base interest rates have lately risen. Furthermore, personal loans are subject to additional fees and interest, which can increase the total cost of the loan. This suggests that the cost of your vacation has risen.
A personal loan calculator can help determine monthly holiday expenses and the impact of various loan offers on your monthly payment. You can simply do it by entering the loan amount, projected interest rate, and payback period.
When to Take Out a Personal Loan to Pay for Holiday Expenses
When it comes to take out a personal loan to pay for holiday expenses, you shouldn’t automatically reach for it. Paying in cash may be impractical in 2023, but holiday expenses are projected to remain high due to inflation and demand. There are a few compelling reasons to take out a loan to pay for your vacation. The average personal loan rate has reached an all-time high of 11.43 percent. If you took out a personal loan solely for vacation expenses, you would have to pay interest for years afterward.
Other Ways to Pay for Holiday Expenses
It is not advisable to take out a personal loan for holiday expenses because it may result in higher long-term expenditures. Here are some solutions to help you fund that trip rather than taking on additional debt for what should be a relaxing getaway.
Savings
Using interest-free savings strategies for vacations is a better option than accumulating additional personal loan debt. Additionally, create a travel savings plan that aligns with your financial objectives rather than depending solely on your emergency fund. Start by cutting back on your monthly income or non-essential product purchases. While setting up a holiday fund can take some time, it might end up being less expensive in the long run than taking out a personal loan.
Credit card rewards
Many credit cards offer cashback or travel rewards programs, which can help reduce out-of-pocket expenses for vacations. Utilizing these programs can potentially cover a substantial portion of your lodging and travel expenses. Before obtaining a loan, it is crucial to assess your rewards balance to determine if it can cover all or part of your expenses.
An introductory 0% APR credit card
Your journey can be funded using a credit card with an introductory 0% APR. If you pay off the balance before the intro period expires, you will not be charged interest on any purchases made during this introductory period. Although they vary, some introduction periods might run up to 21 months. This allows you to spread out your payments without worrying about accruing interest charges.