How to pay for a holiday

Holidays can be expensive. What’s more, they’re usually something you need to pay for in advance – you might well book flights and accommodation for your summer holiday in January, for example.

With significant, lumpy costs to deal with, it’s important to know in advance how you’ll pay for your holiday, whether that’s with cash, a credit card or a personal loan. In this article, we’ll look at the various ways to pay for a holiday, with pros and cons for each.

If you’re already ready to look at finance options, Koyo can provide flexible personal loans of £1,500-12,000 to finance your holiday – you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.

If you want to explore your options though, read on!

4 ways to pay for a holiday

First things first: the best way to pay for a holiday is in cash, using disposable income. We’ll explain the nuances below, but the important thing to keep in mind is that credit options – such as a personal loan or credit card – shouldn’t be used as a way to live beyond your means.

For example, if a big blowout trip to Barbados wouldn’t be affordable for you, then it’s not a good idea to take out a significant loan to fund it.

What credit options can be good for though is spreading the cost of a holiday. So if you’re booking in your summer holiday early in the year and don’t have the money saved up yet, spreading that cost over a longer period can make sense.

1. Cash or disposable income

Paying for a holiday with cash or disposable income will almost always be the best option for funding a holiday. The big advantage is that – unlike with credit options – you won’t have to make repayments, which carry interest.

There’s one potential drawback to paying with cash though: it doesn’t give you the same consumer protections provided by credit cards. If a holiday provider goes bust, you may lose money.

To get around this, it’s possible to pay part of the balance in cash and part on a credit card (so long as you pay at least £100 on the credit card, the full amount is protected), or to pay the full balance on a credit card and immediately pay it off with cash.

Regardless of how you pay, it’s always good to check that your holiday company is part of the ATOL scheme protection, which provides protection if a firm goes bust.

2. Credit card

A credit card is a way of spreading the cost of purchases over a longer period. A big plus (which we’ve mentioned above) is that goods and services you buy on a credit card come with a protection – if the seller fails to deliver, the credit card provider must step in.

This is known as Section 75 of the Consumer Credit Act, and is a real advantage, particularly for holidays. Sadly, it’s not something matched by debit cards.

So what’s the drawback? Credit cards also come with relatively high rates of interest, meaning that unless you repay your balance in full each month, you’ll be stung with significant costs.

One other thing to note is that certain credit cards come with rewards, which can include either:

• Cashback, which you’ll receive as a percentage of what you spend up to a fixed limit, or

• Points, which can be turned into vouchers or used to get money off in various shops.

These rewards are usually pretty small and unlikely to make a difference in the grand scheme of things, but if you’re interested, there’s a full guide to reward credit cards here.

Note that if you use a credit card to spend outside of the United Kingdom, you’ll often face transaction fees – we’ll cover that in more detail towards the end of the article.

3. Personal loan

A personal loan is a really straightforward way to fund a holiday. You borrow an amount, which you receive in your account as a lump sum, and make monthly repayments (usually via direct debit straight from your bank account) until the balance is repaid.

A holiday is a relatively common reason for a personal loan. On the plus side, a personal loan is a simple, easy to understand way to borrow money to pay for a trip.

However, with a personal loan, you’ll pay interest – if you have a very good credit history, this can be low, but borrowers without such a good score will face higher rates.

The other drawback is that a personal loan doesn’t come with the same protections afforded by a credit card. As a result, it’s worth ensuring that you have solid travel insurance, which will cover the cost of your holiday in the event of a cancellation before your departure date.

For more info on how credit cards and personal loans compare, take a look at our guide: personal loans vs. credit cards.

As with most forms of credit, the majority of lenders base lending decisions on your credit history. However, it’s worth being aware of Open Banking lenders such as Koyo, who use Open Banking technology to securely view your bank account data, allowing them to base lending decisions on your real financial situation – rather than solely on what credit bureaus say about you.

To find out more about how Open Banking works, you can also view our separate guide: Open Banking explained.

4. Holiday payment plans

If you’re booking a package holiday, many providers will offer financing options that you can use to spread the cost of a getaway into smaller instalments. In general, you’ll pay a fairly low deposit (usually around 10% of the cost of the holiday, but some providers will waive the need for a deposit entirely) and then make monthly payments towards the holiday.

The interest rate here depends on the provider, but in some cases, 0% deals are available, which can be very attractive. Again, it’s worth making sure that the provider you’re booking offers ATOL protection so that you don’t lose out if it later runs into difficulties.

One potential drawback is that you’re tied to a single provider – e.g. you can’t mix and match. In general, with a package holiday, that’s not an issue though.

Don’t forget travel insurance

If coronavirus taught us one thing, it was the importance of preparing for the unexpected.

For a big holiday, insurance can be invaluable. There are two major things you’ll want to think about:

1. The risk of your holiday being cancelled, whether because of a major world event, your provider going bust or personal circumstances

2. The risk of falling ill or being injured abroad, particularly for winter sports and holidays to the USA, where healthcare can be very expensive

Travel insurance is a huge subject, with lots of things to look out for. For a great guide, you can take a look at this article from Money Helper (formerly the Money Advice Service).

Frequently asked questions about how to pay for a holiday

Should I use a credit card to pay for a holiday?

A credit card can be a very good way to pay for a holiday because it gives you extra protections if the holiday provider goes bust. However, interest rates on credit cards can be high, so you’ll generally want to make sure that you’d be able to repay the balance quickly – ideally in full, each month.

Can you get a personal loan to pay for a holiday?

Absolutely. Many providers will allow you to borrow between £1,000 and £30,000 as a personal loan to pay for a holiday, and this can be a straightforward way to spread the cost. You’ll pay interest though, which can be expensive and won’t benefit from the Section 75 protection that credit cards offer.

For more information on personal loans in general, take a look at our guides on how to get approved for a personal loan and the best loans for borrowers with a “fair” credit score.

What about spending money?

In many destinations (certainly most of Europe) it’s now possible to get by without much cash and to do most of your spending using a debit or credit card. You’ll want to avoid extra costs and bad rates on foreign transactions though. Monzo and Wise both offer good features for overseas use, offering some of the best exchange rates and an allowance for a certain number of free overseas cash withdrawals.

Next steps

Hopefully, you’ve found the above guide useful.

If you’re looking for a flexible personal loan of £1,500-12,000 to finance your holiday, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.

And if there are any questions we haven’t answered, let us know in the comments section below!