Who should and shouldn’t consider a personal loan to pay off vacation debt?

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If you’ve found yourself with vacation debt this year, you’re not alone: ​​more than one in 3 Americans (36%) incurred vacation debt this year, for an average of $ 1,249, according to LendingTree . Plus, it’s often difficult to pay off this debt: A recent NerdWallet survey found that 29% of shoppers who put freebies on a credit card in 2020 carried this debt throughout that year.

An option to pay off that vacation debt that could save you money? Obtain a personal loan, although it can be risky. If you have good credit, a personal loan can be a much more affordable way to finance your vacation purchases instead of a credit card. “If you can qualify for a personal loan of around 5% or 6%, that’s much better than the average credit card, which charges over 16%,” says Ted Rossman, senior industry analyst at CreditCards.com . And a personal loan can make even more sense if you consolidate other high interest debt, such as loan consolidation and credit card debt. That said, it’s not the right option for everyone, and there are risks. Here is what you need to know.

See what rate you may be entitled to

Because personal loans can help borrowers access a significant amount of money, sometimes at a relatively low interest rate, Jacob Channel, senior economic analyst at LendingTree, says they can be a good way to cope. to high interest vacation debt. But it depends on what rate you might get: while someone with great credit may get a 5% or 6% rate, others may be offered more than 20%.

Get multiple quotes

“If vacations come and go and your card balance is large, do some research and use a debt consolidation calculator to see if consolidating will save you money. If you’re looking for a personal loan, pre-qualify with a handful of lenders to get an idea of ​​what rate and loan amount you’ll qualify for, ”says Annie Millerbernd, Personal Loans Expert at NerdWallet.

Don’t forget the fees

Another thing to consider when taking out a personal loan is the fees. “The costs to watch out for are origination costs,” Millerbernd explains. “Personal lenders who charge a origination fee often take a percentage of the amount you borrow on the loan before it reaches your account. This is something to consider if you are trying to borrow a specific amount, because with a set-up fee, you could end up running out of a few hundred to a few thousand dollars, ”says Millerbernd.

Don’t use a personal loan for the wrong reasons

While personal loans, if you get low rates, can make sense for dealing with high interest rate debt, Millerbernd notes that they are a significant liability for short-term discretionary purchases. “Everyone’s looking forward to getting out and traveling these days, but even the smallest personal loans often have repayment schedules of a year or more,” says Millerbernd.

Don’t use a personal loan as a quick fix

If you’re someone who “is considering using a personal loan as a temporary dressing to free up your credit card limits for additional overspending,” Channel says you should consider other options such as credit counseling. Instead, use a personal loan to save money and build better financial habits in the future.

Consider alternative solutions

Another, perhaps cheaper, way to pay off vacation debt is to use a 0% interest balance transfer card. “This will give you a few months without interest to work on your debt, which can take the pressure off. However, you need solid credit to qualify, ”Millerbernd.

Budget to avoid needing loans like this in the future

Channel says the best way to deal with vacation debt is to stay organized and diligent in paying it off. If you’re taking out a personal loan, you’ll need a plan to pay off that personal loan – “look at debt repayment strategies like snowball and avalanche methods,” Millerbernd says – and avoid spending more than you pay off. you can afford for your credit card. This type of planning can be built into your budget.

Make a different plan on how you will handle vacations in the future

“I’m not a big fan of taking on retail or vacation debt. I prefer to see people avoid taking on vacation debt. There may be cheaper ways to celebrate, like buying fewer gifts or giving homemade gifts, ”says Rossman. So in the future, set a good budget and stick to it. “Maybe you and your family can only buy for the kids… or maybe you can create a secret Santa and buy for someone else rather than the whole group. You can also volunteer time by offering to babysit your sister’s children so that she and her husband can have a date without having to pay a babysitter, ”says Rossman.

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