Does it ever make sense to borrow money for a cruise, a trip, or other luxuries?
Truth is, many are against the idea of borrowing for nonessential purposes. They argue that the better option is to pay cash.
That's not a bad strategy if you actually have sufficient money, but what if you don't?
What's the best way to finance a cruise?
Does it Make Sense to Finance a Cruise?
It turns out there sometimes can be good reasons to finance a cruise or other nonessential item. For instance, book your cruise well in advance and you may save big money on your trip. Not only that, you might be able to get such perks as drinks packages, restaurant upgrades, or shore excursion.
Part of the reason to consider financing a cruise is that if you wait to accumulate enough cash, you might never go. That's a problem in the sense that more and more of us have come to value experiences rather than material things. The time spent with others and the opportunity to do new and different things is increasingly seen as more valuable than the possession of stuff.
"Nowhere is this shift in priorities more immediately evident than in travel, at its heart an industry inherently based on experiences." explains a 2018 report from Expedia and The Center for Generational Kinetics. It found that 74% of us value experiences rather than things.
"Baby Boomers," said the report, "are entering a stage where 'less is more,' while younger generations, particularly millennials, are leading the charge in placing a newfound value on experiences, more than things."
"In the shift towards valuing experiences over material products," the report explained, "travel makes an impressive showing. More than half of all Americans say they are saving specifically for travel, with millennials leading the charge. Travel is a common way for all generations, regardless of age, to spend their disposable income."
The upshot of the new attitude toward debt is that people are less guilty when they spend money on fun things. The argument is not that you should spend yourself into bankruptcy or even financial discomfort, but rather that it can pay to re-examine personal preferences. Maybe a few luxuries within financial reason are not a bad idea.
>> Related: Personal Loan Interest Rates (How to Pay Less)
How Can a Personal Loan for a Cruise Save You Money?
Sometimes you have to spend money to make money. And if you don't happen to have cash, it can sometimes be a good idea to use credit.
What about that cruise you've always wanted to take? If it costs $12,000 for a couple, that means you need to save $1,000 a month for your trip.
But wouldn't it be a lot easier if the cruise simply cost less? In fact, discounts are fairly common. Cruise packages are often available for less, but those discounts are frequently reserved for passengers who book (and pay) in advance. How can you book in advance if you don't have the cash? What about a personal loan? Yes, you have to pay interest for the loan. But if you have to pay 10% interest and can cut the cost of your cruise by 20% to 50%, borrowing can help you come out ahead.
For examples of discounted cruise opportunities visit such sites as CruiseCritic.com and CruiseCompete.com. They often have flash sales.
The cruise companies, of course, also want your business. They'd like to deal with you directly. Suppose you book your trip a year in advance. How much of a discount could you get? Could you get a two-for-one? Free airfare? Ship-board credits?
Combining a Personal Loan and Credit Card for Travel Rewards
If you have a rewards credit card, you might even benefit by financing your cruise. Here's the strategy.
First, finance the trip in advance with a rewards card to get a trip discount.
Second, pay off the rewards card with a personal loan before a higher interest rate applies. For instance:
- Price of cruise: $12,000
- Discount for early payment: $6,000
- Value of beverage and internet packages: $500
- Cash back from rewards card at 1%: $120
In this example, paying for your cruise upfront with a personal loan gets you $6,620 in discounts and rewards. If you take out a two-year $6,000 personal loan at 10% interest, the monthly cost is $276.87 and the total interest expense is $645. In effect, the loan costs pay off about $10 in benefits for every dollar paid in interest. In addition, you don't have to struggle to put aside $1,000 per month for a year.
>> Related: Personal Loans vs. Credit Cards
Should You Get Travel Insurance?
If you do decide to book a vacation in advance, make a point of buying trip insurance. This type of coverage can protect your advance payment in many cases if you have to cancel. The returned money can then be used to repay the credit card or loan debt that you took out to finance the trip.
(Note that some travel credit cards include trip insurance if you use them to pay for your cruise.)
When Does it Make Sense to Borrow Money for a Cruise?
There's no universal rule which says it does or does not make sense to borrow money for a cruise, but common sense has to apply.
- If you elect to borrow, what is an amount that's comfortable in your circumstances?
- Is there a way to reduce your costs? If so, there's less need to borrow. For example, you can travel first class or - if you're more adventurous - could venture to the bone with hostels, backpacks, and railroad passes.
- Remember that the cost of the cruise is more than the cost of the cruise. In other words, you must be prepared for additional expenses such as travel to and from the ship, perhaps a hotel and meals the day before your cruise starts, parking your car, and incidental costs as well. Once on board, there are often additional costs for shore excursions, meals, spas, and specialty restaurants. Many ships feature gambling. If you gamble, be sure to set a daily loss limit.
The money borrowed for a cruise must be repaid. You want to have a good experience on your trip and part of that experience is an affordable cruise. If the cruise seems desirable but the cost is too high, then prudence suggests it's not the right time to go. Keep saving and look for deals that can help you achieve your goal.
What Is the Best Way to Finance a Cruise?
There is no best way to finance a cruise. Instead, look at your finances and preferences and then see what form of financing works best for you. Here are some of the options to consider.
What about paying cash?
The quickest and easiest way to fund a cruise is to pay cash. This way there are no worries about loan applications, interest costs or repayment expenses. And you can still take advantage of discounts if you have the money.
Are Credit Cards a Good Way to Finance Your Cruise?
Credit cards can be used to pay some or all of your cruise expenses, depending on your credit limit. Also, with a rewards card you might be able to get back some cash as well as points toward other things. However, credit cards can be expensive. According to the Federal Reserve, the typical credit card interest rate for unpaid balances was just under 17% as of this writing.
Credit cards routinely feature minimum repayment terms which means that users only face small monthly costs. However, borrowers should pay more than the minimum otherwise they may face substantial interest costs that drag on for years.
What Is a Personal Loan for a Cruise?
You can get a personal loan for any purpose depending on your credit profile and ability to repay. Such loans work well for travel because they're typically unsecured financing with a set interest rate and a consistent monthly payment.
Personal loan interest rates run as low as 6% and as high as 36% today. If you borrow $8,000 at 10% interest over five years, the monthly cost is $169.98 per month.
A shorter term will give you a lower overall interest cost but higher monthly payments. For many borrowers, a shorter term is a better option. If you borrow $8,000 at 10% but repay the money over four years, the monthly cost is $202.90. The total interest expense is $1,739 versus $2,199 for the same loan with a five year term. That's a saving of $460.
Travel Loan Alternatives
If you're a homeowner, you may well have seen the value of your property rise during the past few years. Given sufficient equity it can make sense to get a home equity line of credit (HELOC).
The attraction of the HELOC is that because it's a secured form of financing the interest rate is likely to be far lower than credit card debt or a personal loan. Also, the loan term is likely to be longer.
HELOCs, however, can have disadvantages. One is that unlike the typical personal loan, the rate of interest can be adjustable. Also, in the worst possible case, the ownership of your home can be at stake if a HELOC is not repaid.