Planning a family trip to Europe or New Zealand this Christmas or early next year? It can be expensive! While the idea of using monthly payments for items like iPhones is popular, getting a travel loan might not be as cost-effective as it sounds. It's worth reconsidering your options. Travel loans are personal loans taken to fund domestic or international travel. Some lenders have tailor-made products that cover most kinds of travel expenses such as airfare, train fare, bus tickets, accommodation, visa, airport tax, etc., for any travel undertaken within India or overseas by self, spouse, children, parents, family members, or close relatives.
Taking a travel loan provides you with the financial means to book flights, accommodations, and activities without depleting your savings or waiting to accumulate enough money. Moreover, you know exactly how much you would be repaying each month and for how long. However, a loan for travel or holiday can lead to an additional financial burden. Monthly loan repayments can put a strain on your monthly budget. If you're already dealing with other financial obligations, taking on a travel loan may not be advisable. The availability of funds through travel loans may tempt you to overspend on your vacation.
However, if you have the required discipline and if the additional financing is part of a well-thought-out travel plan and budget, then the travel loan will allow you to seize travel opportunities when they arise.
Raj Khosla, founder and MD, MyMoneyMantra.com said, “Availing credit to fund a monetary shortfall for an international vacation is not highly advisable. Travel loans remain a costlier proposition as they remain an unsecured credit facility following which you'll be subject to costlier equated monthly instalments (EMIs). On the flip side, a small-ticket credit facility to find an overseas holiday remains the last resort.”
According to Bankbazaar, since travel loans are personal loans, they are typically offered with higher interest rates than home loans and other secured loans. You need to research the market to find the best loan product suitable for your travel needs. The interest rate on travel loans can start from 10.5 per cent and go up to 24 per cent. HDFC Bank offers travel loans from 10.50 per cent onwards for Rs 40 lakh, for a tenure of 60 months. Tata Capital offers a travel loan of Rs 25 lakh for 72 months, from 10.99 per cent onwards. Axis Bank offers a maximum loan amount of Rs 15 lakh for a tenure of 60 months, from 10.25 per cent onwards. Higher interest rates result in higher EMI outgo.
“Travel loans are a subset of personal loans. With the risk weight tightening by the RBI, the cost of unsecured personal loans including travel loans is bound to go up. This means you would be servicing a large EMI every month. The EMI per lakh on a personal loan at 11.5 per cent interest for two years comes to Rs 4,684. This could be a drain on your pocket in the long-term,” Adhil Shetty, CEO, BankBazaar.com - a financial services website said.
While loans provide easy access to funds, it is very important to plan the EMI payments and dates to prevent them from becoming a burden.” One should analyze their need for funds and should avoid over-borrowing when taking a loan. Also, the EMI amount should not take up a considerable part of your monthly income to make sure you have enough funds left to manage other expenses,” Ameet Venkeshwar, Chief Business Officer at LoanTap, an instant personal loan app, said.
Taking a loan for an international travel can be advantageous for individuals who don't possess credit cards
Those who can't finance a meaningful portion of the requirement by themselves
As a borrower, you're not required to provide any collateral as all travel loans are unsecure
Quick approval-to-disbursal time
Travel loans works wonderfully well for people who are looking for immediate credit
“Higher rate of interest is one of the biggest disadvantages of travel loans as no lender agrees to extend such short-term credit for less than 12 per cent per annum,” Khosla added.
There could be higher processing fees with travel loans
Travel loans are less flexible as a result, you won't be able to foreclose the outstanding amount before the repayment schedule
First, while applying for any loan, be aware of the terms you’re agreeing to. You must check all the terms and conditions thoroughly before signing the agreement. “Additionally, before choosing the repayment terms, such as the EMI amount and loan tenure, assess your income and expenses. This will help you make sure that after paying off your EMI, you will have sufficient funds left to take care of other responsibilities. You must also avoid applying for multiple loans at the same time, as it can negatively impact your credit score. Most importantly, be mindful of which lender you’re choosing for the loan. Check if he’s Reserve Bank of India (RBI)-registered and his credibility. Being diligent can go a long way towards making sure that your experience goes smoothly,” Venkeshwar said.
Plan your travel and calculate your budget. Start saving towards it and make sure you can fund at least half of your expenses. Work on getting your credit score to at least 750+ so that accessing credit would not be a problem and you get good rates. Use a credit card to book tickets and stay. This will allow you to get good deals on your bookings as well as earn rewards and points which can subsidize your costs.
“Don't overborrow even if the lender is offering you a higher amount as the repayments can disturb your financials and there can be instances where you have to take fresh credit to oblige the EMIs. Before giving a final go-ahead, check the fees associated with the loan thoroughly,” Khosla added.
According to experts, as a principal, a loan should never be taken for consumption. That includes wedding parties, iPhones, travel, and vacations. Loans for consumption are a good idea only in situations of life and death. Few people take loans against stocks etc to fund vacation/consumption assuming that it is better not to break the investment. But remember the loan is not free of cost. In most instances, the cost will be higher than the benefit. The right practice would be to save, invest, book the profits, and then spend on vacations.
“In this era of instant gratification, sensible spending will make all the difference between financial success and failure. Borrowing, spending, and paying in EMIs results in higher costs of travel and high stress. Is a fun time of one week worth the stress for one to two years? This doesn't mean that you cannot have fun. Save, invest, reap the profits, and then enjoy a vacation. Even if it takes one year to accumulate, you will experience joy even while saving. Vacation will be stress-free and rejuvenating in a real sense,” Renu Maheshwari, chief executive officer and principal advisor, Finzscholarz Wealth Manager, and a Sebi-registered investment advisor said.