While it isn't advisable to use credit or any kind of borrowing to pay for a luxury such as a holiday – unless you can afford it in the first place – there are some important factors to consider if you do plan to get a holiday loan anyway.
There are many financing options available to those seeking a loan to pay for their holiday, but the rates on the interest are not usually in line with the market's most competitive deals.
This is because the risk is higher for the lender and if you can't afford to pay for the holiday in the first place, then they know they can charge more interest and keep you tied to the debt for longer.
If you are looking to borrow money to pay for a holiday, then there are a few options available.
However, if you can't afford to pay for the holiday with cash, then you should consider putting off the trip for a while longer, as the risks are quite high and the costs can really hit your bank balance after you get back.
Credit cards are perhaps the 'safest' and most flexible option when it comes to paying for a holiday with a loan. Technically, all forms of borrowing are risky, and they are even less safe when they are used to pay for luxuries, but if you absolutely are going to do it, then a credit card is likely to be the best option.
The lender can adjust credit limits if your credit score isn't high enough. Plus, there are several credit cards on the market for people with bad credit.
Many of these credit cards have much higher interest rates than the market leading cards – sometimes as high as 50% APR – but if you pay it back by the end of the month and in full, then you avoid paying any interest.
There are even credit cards that can be used abroad so you avoid paying the foreign transaction fees (you get the credit card issuer's exchange rate at the time of the purchase, without paying any additional fees). Just don't use any credit card to withdraw cash (at home or abroad) as the interest kicks in immediately and accumulates daily until you pay it back in full.
Flexible on repayments
More options on the market for those with a bad credit score
Travel credit cards are available and can be used to make purchases abroad without paying foreign transaction fees
Too expensive to withdraw cash
APR for bad-credit credit cards is very high
Credit limit (and thus your spending power) is likely to be quite low
A personal loan can give you a lump sum of cash, sometimes even the same day you apply for it – but this depends on your credit score and ability to repay the debt.
They can give you more flexibility on what you do with your cash, such as using it to pay for flights and holidays via your bank, and then withdrawing cash at home to exchange and use abroad.
However, the repayments can last a long time and there is very little flexibility in when and how you repay it. You have to pay interest on the loan – whereas with a credit card, if you repay the debt within a month you avoid the interest entirely – although the rates are generally lower than most other forms of borrowing.
Even if you repaid your holiday credit card bills within two or three months, it would still likely be cheaper than what you'd repay on a loan, which could take a couple of years at least (make sure to do your calculations, either way).
You have cash in your bank account, which you can exchange to any currency
More likely to receive a larger amount of cash than with any other type of borrowing
Rates are lower than most other forms of borrowing
Repaying the debt takes longer – usually a few years and is often quite inflexible
APR still likely to be higher if you have a low credit score
Some lenders may suggest you get a secured loan from them instead, which will require you put up your house or car as security and could be repossessed if you fail to repay the debt
This can be one of the most expensive forms of borrowing, but if you ask your bank for an authorised overdraft, you might be able to get a good deal.
If you have been banking with the same provider for a while, they may have more trust in you than, say, any other loans or credit card provider.
However, the terms are still quite restricted, usually charging penalty fees and interest after a very short period – plus you probably won't be allowed to borrow enough to realistically pay for a whole holiday.
Might be able to get flexible and favourable terms if you speak to your bank directly
Likely to receive a very high rate of APR once the authorised period is over
Likely to receive very high penalty fees if you miss a repayment
Unlikely to get enough money to pay for a whole holiday
Paying for a holiday using a travel agent or holiday club's financing schemes should be avoided entirely. The interest rates and conditions on the deals are often exploitative.
These options often seem attractive at first by only asking you to pay a small deposit, and then to pay the rest in instalments.
There are two main types of holiday financing options: the first is where they offer you '0% financing', and the second is where they make you pay interest, and it's usually much higher than any credit card and even less flexible than any loan on the market.
The '0% financing' option from travel agents are not really financing options, because they are not helping you to pay for the holiday in any way whatsoever.
These schemes ask you to pay a portion of the holiday up front, and to pay the rest in instalments and complete the repayment a couple of weeks before you fly. If you do not do so in time, then you don't get to go on the holiday and you don't get your money back.
There is absolutely no risk for the company providing the 'loan'. They make money either way, but you might not get a holiday out of it, so avoid this option.
The second financing option is a little more like a loan, but the repayments usually last a long time, and come with a very high rate of interest. Again, this should be avoided as there are no benefits at all.
Unlikely to consider your credit score or income (this should also be a warning sign)
Extremely high interest rates
Inflexible repayment plan
Far more risk for the borrower
If you can afford the holiday with cash and you have a very good credit score, then a 0% purchases or rewards credit card can be a good way of getting something extra, such as air miles or cashback.
For example, you could use a 0% purchases credit card to pay for a holiday then divide the balance by the length of the 0% offer period. Make this amount your monthly payment and you will have borrowed the money for free.
Beware that many hotel companies and airlines will charge a small admin fee for using a credit card, so just weigh up the benefits of using your rewards or 0% credit card versus a debit card.
For more flexibility, you could use a 0% money transfer credit card to transfer cash to your bank account. There is usually a 4%-5% fee for this service, and you should have a very good credit score to get one.
There are some tips you could use to get the most out of your credit cards on holiday.
Use an airmiles credit card to pay for flights and accommodation, and any other items you need, and collect points to spend for your next holiday
Or use a 0% purchases credit card to borrow for free and pay for your holiday in instalments over the full length of the offer period
Use a 0% foreign transaction fees credit card to avoid paying anything extra on purchases abroad
Or use a 0% money transfer credit card to put cash in your bank account, and exchange it while you're abroad
If you're having to think about how to repay your holiday while you're on holiday then, quite simply, it won't be a holiday.
If you feel there is no way to avoid borrowing to pay for your holiday, then make sure to do so at the lowest cost possible and repay as quickly as possible. And never ever use a payday loan or a travel agent's financing plan to pay for a holiday.