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21 Jul 2020
Jamie Gibbs Alice Campion

Holiday loans: what you need to know

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People on holiday

We talk through the pros and cons of holiday loans, and what you should consider before applying.

It’s great to get away. But there’s no doubt about it, holidays cost a lot of money.

But what can you do to help with the cost?

One option is a holiday loan. This is a personal loan that can cover the cost of your holiday.

We look at what you need to consider before applying, and the alternatives.

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What is a holiday loan?

You can take out a personal loan – or unsecured loan – to pay for your holiday.

Unsecured personal loans are usually for smaller amounts of money, normally under £25,000. Although this varies between lenders.

Providing your credit history is good, you’ll be able to take out a holiday loan without having to secure anything against it.

Secured loans are typically for higher amounts, usually £25,000 or more. Again, this will vary between lenders.

As it’s a large amount of money, the lender will want to make sure they can recover the cost of the loan if you can’t pay for any reason.

They’ll do this by securing your loan against the value of the house, car or other item of value. That way if you can’t pay back your loan, they recoup the value through your secured item.

As your holiday loan is likely to be less than £25,000 you can take out an unsecured loan. Which you’ll pay back with interest on top.

 

How much interest will I pay on a holiday loan?

The interest rate is a charge on the amount you borrow. It’s calculated as a percentage. The rate depends on a few things, but it can be affected by your credit score.

Your credit score tells lenders how successful you are at borrowing money and paying it back. Usually, the higher your credit score, the more likely you are to benefit from lower interest rates.

You can find out more ways to improve your credit score in our guide.

Interest rates also depend on the amount of money you’re borrowing. Usually it’s higher on a low amount of money.

 

What should I consider before applying for a holiday loan?

Consider your budget. You’ll have to pay your loan back in monthly instalments so think how these could hit your wage packet.

If your credit rating is low, a lender might reject your application which could damage your credit rating even more – making future loan applications more difficult.

Before you apply, check your credit rating and see if you can improve it. You can use websites like Clearscore to check your credit score.

Most financial services can initially perform soft credit checks on your account which don’t show up on your report.

These checks are designed to give you a better idea of what you’ll be able to borrow, without having to complete a full application first.

Different lenders may be able to offer you different amounts and interest rates. So it’s worth shopping around.

 

Weigh up the pros and cons 

Pros Cons

Instead of using a chunk of your savings, you can budget the monthly costs of paying back the loan.

The monthly costs aren’t usually flexible. And if you miss a payment it could affect your credit score. 

With a loan, you can borrow more than a credit card or overdraft.

If you don’t have a good credit score, then you may not benefit from good interest rates.

You can benefit from competitive interest rates if you shop around. 

The interest rate adds to the cost of the loan, so you may end up paying more for your holiday.

You can choose how long you’ll need to pay off the loan, which can help you budget for the monthly payments.

There’s a chance you could be paying off your holiday loan for a while, depending on how much you decide to borrow.

The money from the loan goes straight into your bank account. This means you can use the money to buy foreign currency – avoiding the credit card charges when spending abroad.

 


Do I have to take out a holiday loan, or are there alternatives?

If a holiday loan isn’t right for you, there are some other alternatives:

Pay off your holiday in instalments

Most holidays will have an option to pay in instalments. Usually you put down a deposit, then you continue to pay it back over the following months.

If you plan far enough ahead then these payments can be quite manageable, and it saves you paying any extra interest.

0% credit cards

You could buy your holiday using a 0% credit card.

This means you could pay back the value on the credit card without having to pay any interest on top.

With some credit cards, the 0% interest only lasts for a certain period. Make sure you pay off your holiday before this starts.

Low-interest overdraft

Some bank accounts offer little or no interest rates on their overdrafts. This could work well if you know you have the budget to pay off the cost of your holiday.

Make sure you check the small print on your overdrafts T&Cs though. Sometimes the interest rates can change after a certain period.

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