How to get a loan for a holiday

·6-min read
 (Getty Images/Lonely Planet)
(Getty Images/Lonely Planet)

Holidays don’t come cheap so if you’re planning your next getaway, you might be considering how to pay for it.

Wherever possible, it’s best to use any savings to cover the cost of your holiday and thus avoid getting into debt. But if your savings do not stretch far enough, you could consider borrowing through a personal loan.

Here, we explain how holiday loans work and how to get the cheapest deal.

What is a holiday loan?

A holiday loan is simply a personal loan that can be used to help pay for your holiday, whether that’s your annual summer break or a trip of a lifetime.

By applying for a holiday loan you’ll be able to borrow a fixed sum of money which you’ll need to repay in monthly instalments over a fixed term.

Personal loans are unsecured which means you won’t need to use your home or another asset as security in the event you can’t keep up with your repayments.

Related: Compare Loans & Find The Right Deal For You

How much can I borrow?

Personal, or holiday loans typically let you borrow between £1,000 and £25,000, which should be enough to cover the cost of your holiday whether you’re planning a week’s break in the UK or Europe, or a trip around the world.

However, it’s crucial to only borrow an amount you know you can afford to repay.

What interest rate can I expect to pay?

Personal loan rates are usually the most competitive if you’re planning a more expensive holiday, with loan amounts of £7,500 or more attracting the most favourable interest rates at just below 3% APR. APR means annual percentage rate and dictates how expensive a loan is. The higher the figure, the more expensive the loan.

Should you only be looking to borrow a smaller sum, say £2,000, the best rates are usually between 13% and 25% APR, making it a more expensive option.

When do I need to repay the loan?

Most travel loans need to be repaid within one to five years, although you may be able to borrow for up to seven years or more.

Choosing a longer term means that your monthly repayments will be cheaper, but it also means you’ll pay more in interest, making your loan more expensive overall.

For example, let’s say you borrow £7,500 over three years at a rate of 3% APR.

Your monthly repayments will be £217.98 and the total amount repayable will come to £7,847,11. The loan will have therefore cost you £347.11.

In comparison, should you borrow £7,500 over five years at the same rate of 3% APR, your monthly repayments will be lower at £134.63, but the total amount repayable will be higher at £8,077.82.

This means the loan will have cost you over £230 more than if you had repaid it over three years.

What are the pros and cons of a holiday loan?

Pros

  • Monthly payments are fixed, making it easier to budget

  • You can choose how long you need to repay the amount borrowed

  • Interest rates can be competitive, particularly on sums of £7,500 or more

  • You can typically borrow more than you could through other forms of credit, such as a credit card or overdraft

Cons

  • Holiday loans can be expensive for smaller borrowing amounts

  • The most competitive rates are usually only given to those with excellent credit scores – the APR has to be offered to at least 51% of successful applicants, but the remaining 49% could be offered a higher rate

  • Payments are not flexible, so it’s vital to ensure you can afford to meet each monthly repayment

  • If you decide to pay off your loan early, you may have to pay an early repayment charge – often the equivalent of one to two months’ interest

  • You may have to pay an arrangement fee.

Is a holiday loan right for me?

As a general rule it’s best to avoid relying on credit for non-essential purchases, so you’ll need to consider carefully whether taking out a loan for a holiday is strictly necessary.

You’ll also need to think about how much you realistically need to borrow and whether you can afford to pay back this amount. Consider, too, how long you want the term to be – after all, do you really want to still be paying for your trip away five years down the track?

If you do decide to take out a holiday loan, the easiest way to search for the best deals is to use an online comparison service. Keep in mind that to qualify for the most competitive interest rates, you’ll need a good credit score.

If your credit score is below par, you’ll find it harder to get accepted for a holiday loan, so it’s worth taking steps to improve it such as checking you’re on the electoral roll, paying bills on time, and correcting any mistakes on your credit report.

How else can I pay for a holiday on finance?

Before choosing a loan to fund your travel plans, it’s worth weighing up some of the other options available to you.

For example, a 0% purchase credit card could be a better option, particularly if you’re only looking to borrow £2,000 to £5,000.

Interest-free purchase credit cards enable you to spread the cost of your holiday (or any other purchase) over a number of months without worrying about interest stacking up.

Always be sure to calculate how much you’ll need to pay off each month to have cleared the balance before the 0% deal ends and interest kicks in. So if, for example, you borrow £3,000 on a credit card offering 0% on purchases for 15 months, you’ll need to pay off £200 a month.

Another advantage of paying for your holiday with a credit card is that you’ll have protection under Section 75 of the Consumer Credit Act.

This means that, providing you have spent between £100 and £30,000 on your card (even if this is just a deposit for the holiday), your provider will be jointly liable with the retailer or trader if your holiday is cancelled or the tour operator goes bust.

Alternatively, you could consider using an overdraft to help fund your holiday, but this tends to only be an option if you need to borrow a fairly small sum of money over a short time. Always look for a low-cost or interest-free option if you are going down this route and make sure you pay back your overdraft as soon as possible.

Related: Compare Loans & Find The Right Deal For You

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