After a year of being cooped up, folks are booking post-pandemic travel again. A fast-growing crop of apps aims to help you book your trip now and pay later, but should you take advantage?
Third-party financing companies are everywhere you can make big-ticket purchases these days. As interest in post-pandemic travel ramps up, these online financing companies are expanding their partnerships with airlines and other vacation companies. This spring, for example, Vrbo announced you can book a vacation on its site and pay for it later using Affirm, a company that offers installment payment plans.
This may make booking vacations more affordable and accessible, but it could also lead to dangerous spending beyond what you can feasibly pay back. Some 57% of online consumers polled in a recent study told C+R Research they overspent when they used a buy now, pay later program, and they now regret it. When booking vacations further out, it could be tempting to spend money you don’t yet have. But you need to understand what you're getting into if you opt to book with a financing app.
Here’s how they work
These companies aren't informally offering to stretch your payments out — they're actually offering personal loans, where you’ll pay a fixed interest rate over installments. They're different from credit cards, which have variable interest rates and charge late fees. And they're different from banks, in that they're not lenders themselves but instead connect users to loans from banks. (You can find a list of the lenders these companies use to issue loans on their websites.)
Depending on which payment app you use — they all work slightly differently, as Money has reported — payments will get split up between as little as a few weeks to as long as a few years, according to your preference. You’ll be assigned an interest rate of about 0% to 30% APR, based on data including your credit score. Rates are presented before you commit to the loan.
Instead of paying the company you’re making a purchase from directly, you’ll see a monthly charge from the app on your checking account.
Forty-six percent of Affirm loans are 0% interest, the company says. But that doesn’t mean you’ll necessarily receive the lowest interest rate. “Where your credit score drops, you need to understand that there's going to be a higher cost for borrowing than someone with prime credit,” says Bruce McClary, senior vice president for communications at the National Foundation for Credit Counseling (NFCC). “So the interest rates that you're offered may not be the best rates available to consumers in the market right now.” Uplift says its average user is charged a 20% interest rate.
McClary cautions consumers to pull a copy of their credit report and understand that “the higher the number, the less you’re likely to pay when you’re borrowing money."
Still, if you’re offered a three-month loan at 0% interest and you are absolutely positive you can make the payments on time, “that might be a great deal,” says Alvin Carlos, a financial planner and managing partner at District Capital Management. If you're really interested in trying out a payment app like Affirm or Uplift, a shorter-term loan is better than a long-term loan. It'll be easier to keep track of and you'll have the debt paid off more quickly.
You'll get regular reminders from the app so you don't forget an upcoming payment, but you also have the option to automate the payments. Set up an automated payment from your checking account or debit card so you can see withdrawals as they go through. Affirm allows you to pay with a check, but the lag between when they get the check and credit it to your account is up to 10 business days.
As an extra incentive, some travel companies have partnered with these apps to cover the interest on loans for certain purchases. Carnival Cruise Lines and Allegiant Air are currently covering the interest on some purchases made through Uplift. Without that deal, borrowers with bad credit could pay interest of up to a whopping 36% on that app.
Will using an online installment plan affect my credit?
These fintech (financial technology) companies generally report late payments to the three main credit reporting agencies — Experian, Equifax, and TransUnion — so making late payments will impact your credit score just like with any other loan.
When it comes to your credit score, there’s no real advantage to using a traditional personal loan (which you apply for directly with an online lender, a credit union or a bank) over an online installment program, McClary says. “But the differences are in the features that are offered by these lenders,” he says. “You have some that are operating in the fintech space that offer in some cases more flexibility in the terms for repayment, and in other types of conveniences that make it easier to use the starter loan and manage your account activity.”
Here’s how financial planners say to budget for vacation
There are plenty of ways to pay for travel that don't involve taking out a loan. The first step to take when thinking about your post-pandemic vacation is to make a list of a handful of places you’d like to visit and map out the total cost of each possible trip, says Andy Baxley of The Planning Center.
“Consider not only airfare, but costs on the ground as well,” he says. And don’t forget to include some options that you can get to via car in case your budget won’t allow for flights.
Pick a date for the trip that leaves you plenty of time to save for it. “Then, take a look at your budget to see how much you can afford to spend without having to put the trip on a credit card.”
If you don’t already have a practice of saving for vacation, Carlos recommends using a budgeting app like Mint.com to take a close look at your spending. “Examine all expenses carefully to try to free up more money to save for your vacation,” he says. “This can mean cancelling services you're no longer using. Or cancelling services you can do without.”
Then create an automatic monthly vacation savings transfer to a separate savings account.
Finally, narrow your destination options down to “only those places that are within budget,” Baxley says. And voila — you have a trip planned that’s well within your means. Baxley "almost never" recommends people rely on financing apps for big-ticket purchases. "A lot of people don’t realize they’re inviting a third party financial institution into the transaction when they put trips on credit with these companies," he says. If there are no travel issues, the process can be easy, but if anything goes wrong and you have to cancel your trip, you may have paid interest that you can't get back. "I think it can add a lot of undue stress and complexity."
There are more ways to get a good deal on travel
Julia Menez is an actuary by day, but she also hosts a podcast about how to hack the travel industry by maximizing credit card and rewards points and advises clients on the side. The goal of travel hacking (it’s a whole thing) is to save big money on travel.
Travel rewards credit cards are the main tool in Menez’s travel kit, but she says saving money on vacations can be complicated. “I always remind people for this to be viable you have to be able to pay your balance in full,” she says. Similarly, Menez's avoids installment plans in favor of looking for ways to save money on trips.
Menez says setting up notifications for vacation spots or flight deals is the way to go if you want to find a bargain. “If you're already planning on where you want to go and you can just set up flight notifications, you'll save money that way, too,” she says.
Consulting a travel agent is another way to try to save money on a vacation. They’ll have access to perks you can’t find online and can sometimes offer payment options that mirror those of an installment loan minus the interest.
“If they’d like me to charge their card a regular amount once a month, I am happy to oblige,” Stephanie Serino, a luxury cruise specialist at Tzell Travel Group and long-time travel agent says of her customers. She says when clients work with her to book a trip, their final balance isn't typically due to the vendors until two to three months before the vacation, but it may have been booked over a year in advance. Often, she'll process some payments beforehand if clients tell her "they got a big bonus at work or something and just want to make some payments so that they don't have the big final balance due at the end."
If you're booking a trip on your own that's scheduled for months or a year from now, Serino says you may find the hotel or bed-and-breakfast you're staying at will work with you to gradually pay without charging interest. It doesn't hurt to ask.
"Even if you're booking your own trip... you should demand the ability to make payments whenever you want to before the final balance is due," Serino says. Some cruise lines and tour operators also offer the option of splitting the cost of your trip into automated monthly payments.
The most important thing is that your vacation should be "a source of relaxation, not a source of future stress,” McClary says. He strongly cautions people from taking on serious debt as they plan post-pandemic trips. “The need to have a vacation right now should not supersede the need to maintain a balanced budget.”
You waited so long to get to the point where you could take a vacation, don’t rush to get in over your head. Take a beat and consider all your options.