In an ideal world, everyone would have enough money to travel. But in reality that’s not the case. And for many people, their best option for travel is taking out a personal loan.
And in many situations there’s nothing wrong with that. Personal loans are a great way to reach a short term goal, and with better interest rates than credit cards, are a much safer way to fund your holiday. However you do need to approach this sensibly. Banks see the yawning gap between reality and aspirations as a tremendous opportunity, and you need to be smart enough to borrow responsibly.
So if you’re considering taking out a personal loan for travel, make sure you’ve understood the following.
Should You Take Out a Personal Loan to Travel?
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Credit Cards vs Personal Loans
A travel loan is the same as any other personal loan. You borrow a sum of money to fund an upcoming expense, in this case your holiday. When you take out the loan you agree to the terms and conditions, including paying interest and any associated fees, as well as a repayment schedule.
A personal loan doesn’t have the additional benefits of a credit card such as warranties and purchase protection, rewards points, travel benefits etc. However, the interest rate charged is usually a lot lower than that of a credit card, and you can borrow a lot more. There’s a certainty about the amount of time it will take to become debt free, and a repayment schedule means you can easily factor repayments into your budget.
You can use personal loan calculators before committing to a loan to calculate how much your repayments will be, how long it will take to pay back the loan and options for making extra repayments.
Credit Cards AND a Personal Loan
If you’re more inclined towards a credit card for the benefits like insurance and rewards points, though want the lower interest rate and certainty of repayments of a personal loan, one approach to consider is using a credit card while you’re away, and then consolidating your debt into a personal loan once you’re home.
That said, you should organize your personal loan before you start traveling so you’re not caught out if you don’t get approved. You don’t want to run up a $30k credit card bill to come home and find out you can only get approval for a $15k personal loan. Approval for a loan will usually last up to 60 days, as long as your circumstances haven’t changed.
Don’t Borrow if You Don’t Need the Money
Personal loans are tempting because they’re readily available and offer cash up front. But it doesn’t make sense to borrow if you don’t need the money.
Before taking out a personal loan, sit down and review your finances to decide if you really need to borrow in the first place. You may not want to use funds you have tucked away in the bank, but if you do have savings, this may save you more money in the long run since you won’t be paying interest on top of it.
Find a Loan That’s Right For You
Banks are falling over each other to attract business, but don’t take a loan just because it is available. You need to undertake proper research, compare the market, and find the personal loan which is right for you.
Most people know to compare the interest rates which vary from bank to bank. However you should also take into account the processing charges, documentation charges and pre-closure charges. Consider not only competitive interest rates, but also whether there is fast pre-approval, and any associated monthly fees.
For Australians heading overseas, People’s Choice Credit Union is a great place to start your comparisons, and a reputable indicator of what a competitive personal loan should be.
Don’t Borrow More Than You Can Repay
The most important thing to consider when taking out a loan for travel is if you can actually afford to do so. You need to have confidence in your cash flow, and only take out a loan that you can easily repay.
Never take the risk of living beyond your means. Your monthly loan repayment shouldn’t exceed 50% of your monthly income. Once this happens, other critical financial goals, like saving for retirement or your kids’ education gets sacrificed. Travel is important. But it shouldn’t come before food, education, or mean you end up on the street.
And make sure that you don’t miss a repayment. Delaying a payment can negatively impact all three credit scores, and hinder your chances of taking a loan for other needs later in life.
Understand the Fine Print
Sure, loan documents don’t exactly make for light reading. But it’s essential that you read the terms and conditions carefully to avoid any unpleasant surprises.
Before you sign on for a personal loan, make sure you’ve read the document properly, and that you understand it. Make sure that the terms and conditions are filled in completely and match with those that you agreed upon when taking out the loan.
Let Your Family Know
If you’re living with a spouse and/or dependents, discuss it with your family before you take a loan. This is important because the repayments will impact the finances of your entire household. So you should make sure that it’s something everyone is on board with, and something that both you and your spouse agree to do.
If you’re traveling solo, often you can take out a loan with a family member as a guarantor. If there’s no way you would ever let your family down, this could be a way to ensure you borrow responsibly and don’t get sloppy with repayments.
Use the Money Productively
You can take out a massive personal loan if you choose to, and plan for an incredible holiday. However it’s important to limit the amount you borrow to only covering the essential costs, because you do need to repay it, and it does come with an interest rate.
You don’t want to spend years paying back a two week holiday. So take out a personal loan, but travel within your means, and pay it back as soon as possible.
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Disclosure: Post completed in collaboration with People’s Choice Credit Union. All advice and opinions expressed are our own. Congratulations on reading the fine print! Now go and do the same for your personal loan!