3 Ways to Pay for Your 2021 Vacation

Planning a trip this year? Here's how to pay for it.

Many people spent the bulk of 2020 cooped up at home due to coronavirus-related concerns. And now that things are looking better as far as the pandemic goes, a lot of people are gearing up to take a vacation this year.

But how will you pay for that trip? Here are some options to look at.

1. Your savings

Many people don't have money sitting around in the bank. But if you have a chunk of cash in savings, that's generally your best bet for paying for a vacation. That way, you won't have to rack up any debt and pay interest on it -- interest that will only add to the cost of your trip.

That said, don't tap your emergency fund to cover your vacation costs. That money should be reserved for unplanned expenses only. If you have money available on top of what you need for emergencies (which is generally three to six months of living costs), then by all means, take a withdrawal. But otherwise, seek out an alternative way to pay.

2. A vacation loan

If you don't have savings to pay for a trip, then a vacation loan could be your next best bet. A vacation loan is a personal loan you take out to fund your travels.

The great thing about personal loans is that they let you borrow money for any purpose, and that includes getting away. And to be clear, when you approach a bank or lending institution for a vacation loan, they may simply refer to it as a personal loan, so don't worry -- that's what you're looking for.

The upside of a vacation loan (or a personal loan for vacation purposes) is that you'll generally pay less interest on it than you would with a credit card. On the other hand, you will pay some amount of interest, which means your trip will cost you more than it would if you were to pay cash (or put it on a credit card and pay it off right away).

If you want to snag a competitive interest rate on a personal loan, you'll need a strong credit score. Personal loans are unsecured, which means they're not backed by a specific asset. (Whereas auto loans, for example, are secured loans, and the vehicles they finance are used as collateral so that if a borrower falls behind on payments, that vehicle can be repossessed.) As such, your lender is relying on your borrowing history and creditworthiness to assign an interest rate to you. So it's in your best interest to make sure your score is in good shape before you apply.

3. Credit card points

Charging a vacation on a credit card is generally not a wise move because credit cards are notorious for carrying hefty interest rates. On the other hand, if you have credit card miles or reward points you can cash in, that's a great way to pay for some or all of your trip. You might, for example, be able to score yourself a free flight or a few free nights of lodging at your destination.

After grappling with a pandemic for over a year, we all deserve a vacation. Figure out your best option for paying for yours so your experience isn't marred by needless financial stress.