While loans are best availed for creating assets or for increasing earning capacity, there are certain situations where availing loans for consumption or recreation becomes unavoidable. Taking a honeymoon trip just after marriage, attending some unavoidable social or family function, taking a trip for health-related purpose or taking your aged parents for religious/pilgrimage purposes are some situations that one can rarely plan in advance or avoid at the last minute. An easily available personal loan or a travel loan can come in handy in these circumstances.
A personal loan is an unsecured loan that you can use for any purpose, including holiday funding. The proceeds from this loan can be used to cover any or all aspects of your trips such as purchasing air tickets, hotel stay and even exotic cruises. Processing of such loans is comparatively simpler and faster once you meet the eligibility criteria and have appropriate documentation. Note that interest rates on personal loans can go up to as high as 24%.
Some banks and NBFCs have come up with specifically branded personal loans for travel, termed as travel loans. While personal loans are usually unsecured loans, travel loans can be both secured and unsecured. Travel loans also have lower processing fee and lesser maximum loan amount than personal loans. The interest rate on secured travel loans can be lower than personal loans.
When to opt for personal loan for travel
There could be many situations when you cannot postpone your travel plans. They could be travelling overseas for a family wedding or other function or taking your family member for urgent medical treatment. Opt for travel finance if you are short of cash and have no other redeemable investments. Similarly, it is always better to opt for personal loan for funding your tour instead of dipping into your emergency fund or redeeming high return yield investments such as equities or equity funds.
When to avoid personal loans for travel
I would recommend you to avoid borrowing from banks/lenders if you can fund your travel expenses from your pocket. This way, you would end up saving money that you would otherwise have to spend as interest on EMI.
Consider avoiding personal or travel loan if your net monthly savings are not enough to service your personal loan EMIs. Ideally, your EMIs should not exceed 40% of your net monthly income. As an alternative, you may choose to redeem your surplus low-yield investments such as fixed deposits and debt funds, to finance your travel as their returns are usually lower than your interest payouts. So, if your existing FDs are paying you 9-10% interest p.a. (net of IT benefit/impact), it is better to close those FDs instead of availing personal loan costing, say 15% p.a. Also, avoid taking loan for traveling if your credit score is poor.
Alternatives to personal loan
Credit cards: Credit cards can be used to finance your tours as they allow you to pay off your expenses after 20-55 days of incurring expenses. You can also opt to convert those dues into EMIs. However, make sure to compare their interest rates with that of personal loans. Typically, the interest rate on credit card EMIs can range anywhere between 18–25% per annum while the interest rate personal loan or travel loan ranges between 12–25%.
Loan against securities: Loan against your securities, such as mutual funds or stocks, have lower rate of interest than personal or travel loans. Opt for this loan if you have enough long-term investments to be used as collateral for financing travel.
To sum it up, travel finance like any other loans has an inherent interest cost. Avail personal loans for tours if the tour is of high priority or unavoidable. Instead of availing loans for travel finance, start planning early and create a corpus for travel expenses by regularly investing in debt-oriented mutual funds. However, if the tour is unavoidable, make sure to compare various personal loan options.
The author is CEO & co-founder, Paisabazaar.com