Should you take a loan for your vacation
It’s nearing the end of the year, and you need a break. Preferably somewhere abroad. But as your cursor hovers over the “buy” button for airline tickets, you’re wondering if you should spend so much. Would it be better to take a loan instead? Here’s how to make a decision:
1. How much is left in your savings, if you pay for the vacation at one go?
This is the single most important consideration. If you pay for that vacation all at once, how much is left in your bank account?
You should strive to maintain - at minimum - three months worth of expenses in your savings. If going on vacation would leave you with less than that, you’re walking a dangerous line. Accidents happen all the time, from breaking a laptop you urgently need, to kitchen pipes bursting.
If you don’t have enough saved, it may be a better idea to take a loan which you pay back monthly, instead of wiping out your funds. Just be sure to compare between the different loans, to minimise any interest you pay. For example, the HSBC personal loan can lend you up to $5,000 for your vacation, with monthly repayments as low as $436 for a one year loan tenure (an interest rate of just 4.49% per annum).
2. Will your expense ratio stay below 30%, even with the loan?
Before you borrow for your vacation, check if the loan obligations would be manageable. A rule of thumb is to keep an expense ratio of 30% or below.
For example, say you have a monthly income of $4,000. An expense ratio of 30% would mean the total cost of all your expenses (personal loans, utility bills, phone bills, etc.) don’t exceed $1,200.
If taking a loan for a vacation would cross this threshold, then you should either use your savings instead (in which case see point 1), or hold off until you’ve paid down your existing debts.
3. Can you pay for a specific vacation cost with the loan?
It doesn’t have to be an “all or nothing” endeavour, when it comes to loans. Just because you can borrow enough for your entire vacation, that doesn’t mean you have to. Instead, consider covering some of the costs with a loan, to save money or have more disposable cash on the trip.
For example, if the main “killer cost” is $200-a-night hotel rooms, then consider taking a loan just to cover this; pay for the other aspects of your trip in cash.
There’s an important reason for mentally compartmentalising your loan this way - it stops you from overspending. Otherwise, you might end up taking the full loan (probably than you need), and then blowing it all on impulse buys (I’m already on the hook for the loan, I may as well spend it all!)
4. What is the source of the loan?
If the loan would come from a personal loan or line of credit, sure. If the loan would come from a credit card, then no.
Never borrow on your credit card when you can use a personal loan. The interest rate is always higher: about 26% per annum, compared to an average of 6%t per annum for personal loans.
You should use the credit cards as a mode of payment. That is, pay back the full amount immediately, so you get the rewards and cashback without paying interest.
Actual borrowing should be restricted to personal loan deals. You can compare between the cheapest personal loans on GoBear.com.
5. Would you be left with a decent spending budget, if you don’t use a loan?
If you pay it all in cash, will you have a reasonable amount to spend? There’s no point going abroad with miniscule amounts of money, and spending the entire vacation in roach-ridden cheap motels, while skipping lunch every other day.
Given the high price of accommodations and flight tickets, you may as well spend a little more for a great vacation, than spend anything at all for a lousy one. If a loan could do this for you, and fits within your expenses (see point 2), it might be worth using one.