Should You Opt for a Holiday Loan?

A good vacation is necessary to reduce stress and give yourself space and time to get back to the routine with a clear mind. Nowadays, with a prolonged period at home due to the pandemic, most people are preferring to travel to new and exotic places that are not just good for fun but are safe too. However, a good international vacation can cost a pretty penny. When planning a vacation, we generally think of immediate expenses like accommodation, flight tickets, food, visa, travel insurance, etc. But, there could be so many other expenses that can go out of budget. Therefore, many individuals prefer to fund their holidays with a loan.

A Personal Loan is one of the popular types of loans in India. People typically used to borrow funds with a personal loan to fund their big purchases, weddings, education, home renovation, etc. However, nowadays, the number of people taking a personal loan for travel is rising.

A Holiday Loan is nothing but a personal loan taken for travel. Several banks and Non-Banking Financial Companies (NBFCs) offer personal loans for travel under a specific loan category - Holiday Loan or Travel Loan.

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Here are a few benefits of the Holiday Loan:

• Holiday Loans can get approved and disbursed within a couple of days, depending on the terms and conditions of the bank/NBFC. If you have a pre-approved personal loan offer from a financial institution, you can receive the funds within a few minutes.

• These loans are easily available and do not require much documentation.

• The entire loan process can be done online from the comfort of your home.

• Since it is an unsecured loan, you do not have to provide any collateral, security, or guarantor to avail of a loan.

• A fixed interest rate of the holiday loan ensures you easily plan your repayments with a clear structure of exact dues.

• Timely monthly repayments help you build your credit score.

• Since the lenders offer convenient repayment plans throughout the loan tenure, you do not have to wait until you save enough for your dream holiday.

Here are some of the disadvantages of the Holiday Loan:

• The rate of interest on a holiday loan is considerably higher compared to the other types of loans, and this will increase your total holiday cost and can increase the EMI burden.

• Any delay or default in loan repayment will negatively impact your credit score.

• Most banks and NBFCs charge high pre-payment and foreclosure fees. Therefore, if you are planning to repay the loan before the tenure, you should check for these charges and then make the decision.

Is it a good idea to take a holiday loan?

A holiday loan or personal loan for travel does not require any collateral, and there are no restrictions on the end-use of the loan amount. Hence, it can be used to cover any of your travel or non-travel-related expenses. However, these unsecured loans carry very high-interest rates.

A personal loan can be a good or bad loan, depending on its end-use. Although taking a holiday loan and repaying it in convenient monthly instalments seems an efficient way to plan your dream holiday as you do not have to delay your vacation for lack of savings. It is not advisable to plan your holiday with borrowed funds.

The interest rate for a travel loan could be anywhere from 12% p.a. to 28% p.a., depending on the bank/NBFC policy. So, if you take a holiday loan of Rs 5 Lakhs at the rate of interest of 15% p.a., you will end up paying Rs 17,333 for three years for 5-6 days of vacation. You will pay Rs 1,23,976 total interest throughout the holiday loan tenure.

Apart from the expenses that you cover from the holiday loan, you might come across some unexpected expenses, or your holiday budget can get stretched. In such a case, most travellers use their credit cards. If the credit card bill is huge, some people covert it into credit card EMIs. The high-cost holiday loan plus the huge credit card dues can create a financial burden on you and can also make you fall into a debt trap.

In case you need to borrow in the future for any emergency or unavoidable reason like a child's education or hospitalisation of a family member, it can become challenging to avail of a new loan as the holiday loan will increase your debt-to-income ratio. The lenders avoid offering high amount loans to individuals with high debt-to-income ratios or they might charge higher interest rates as it increases their risk. Furthermore, the multiple EMIs are not only difficult to manage but lead to a debt trap in most cases.

A few days of enjoyment can lead to long-term financial stress. Therefore, saving enough money over the period to fund your holiday is the best way. Consequently, it is advisable to take a personal loan only for unavoidable expenses and financial emergencies that cannot be covered with your savings. It does not make sense to take a holiday loan for 5-6 days of enjoyment and live under the huge EMI burden for the next 3 to 5 years. Taking loans to enjoy luxuries is not a sign of financial discipline. Hence, it is not advisable to opt for a Holiday Loan for your next vacation.

Warm Regards,
Ketki Jadhav
Content Writer