Does It Make Sense To Pay For Your Holiday With A Personal Loan?
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Everyone dreams of taking a holiday, but it’s not always easy to afford one. The financially savvy will end up charging everything to their credit card to earn cashback and bonus points (and even air miles).
These individuals might also know that you should never take a personal loan to go on holiday. Yet, what if the option isn’t as bad as they might think it is?
Pros and cons of using personal loans
Taking a loan is not something to be taken lightly. Paying it back is a major responsibility, and those interest charges can add up over time. However, they are not all bad – if you know how to apply them.
| Pros | Cons |
|---|---|
| Lower interest rates - Personal loans in general tend to have lower interest rates compared to credit cards. Additionally, most personal loans have fixed interest rates, thus are less affected by fluctuating market rates. | Fees - Depending on the lender, you may be charged some extra fees upfront or during the course of your term. For example, some lenders charge a prepayment penalty if you pay off your loan early. |
| More control over budget - Personal loans tend to come in fixed amounts delivered lump sum. This makes it much easier to stay on a budget. | Lack of rewards - Credit cards often come with great rewards and perks such as cash back or points. Personal loans generally do not come with any of these. |
| Predictability - Due to having fixed a fixed interest rate and repayment term, personal loan repayments will remain the same over the life of the loan. You will not be surprised by a sudden increase in monthly payments. | Higher monthly payments - While not always the case, personal loans do tend to have higher monthly costs than credit cards. This leaves you with less breathing room in your budget. |
| Versatility - Personal loan lenders tend to not impose any restrictions on how to use the funds they offer. As such, you can pretty much use the money as you see fit. One added benefit is that you will have cash at hand. | Fixed cash amount - Since you get a lump sum of cash with a personal loan, it is great if you are on a budget. However, it also can be restrictive. |
Pros and cons of using credit cards
Credit cards are the weapon of choice when it comes to holiday shopping. Credit card issuers want to encourage users to spend as much as possible. As such, credit cards tend to offer many additional rewards and benefits for using them.
| Pros | Cons |
|---|---|
| Spend as and when - The biggest advantage of credit cards. You can spend as you go, so long as credit cards are accepted. This gives you more flexibility and less restrictions on spending. | Higher interest rates - Compared to personal loans, credit cards will tend to have higher interest rates. This could cause issues if you’re unable to pay off the entire bill at the end of the month. |
| Potential savings - Credit cards encourage more spending. One way they do this is by offering special discounts on select items or promotions on top of cash back options and reward points. | Overspending - With credit cards, you are free to spend wherever and however you like. But this flexibility is a double-edged sword. If you are not keeping close tabs on your balance, you might get carried away and end up spending much more than you intended. |
| Flexible payment options - With credit cards you have the option of paying a minimum amount every month (which incurs interest on the unpaid balance) or pay the full amount every month to avoid penalties. | |
| Avoid paying interest - Certain promotions allow you to apply for a credit card with no interest rates for a limited time. With most cards, you can also avoid paying interest by not carrying a balance. |
Should you use personal loans or credit cards for holiday spending?
Ultimately, the final decision will be up to you. However, both personal loans and credit cards can offer unique advantages if you need a little financial boost for holiday spending.
On one hand, personal loans might be a great option if you plan to operate on a budget. If there is a fixed amount you plan on spending, a personal loan will help to keep you within budget due to it being a fixed amount of cash. This is perfect if you struggle to stick to a budget.
On the other hand, credit cards come with the risk of overspending and require much more self-control. However, if you can reign your own spending in, then credit cards are a better option. This is because you don’t have to pay interest at all if you clear your balance each month. Additionally, you can benefit from cash back or great rewards with credit cards.
Just keep in mind that cash is still an option as well. While it is losing popularity compared to digital payments, cash will help you to avoid debt and paying extra interest.
