You can take a loan to fund your summer sojourn in Europe, but it pays to be careful

• Travel loans are personal loans and since they are unsecured, they have a high rate of interest.
• Make sure your EMI is not more than 10% of your monthly income.
• Carefully read and understand the terms and conditions of the loan, including repayment schedules and any potential penalties for late payments.

A trip to Europe may be on the bucket list for many people, but it can burn a hole in your pocket. However, in this age when you can buy an iPhone 14 Pro Max in monthly instalments, you can also fund your Europe trip through a loan.

“Personal loans for holidays are similar to regular personal loans, except that the borrower has flexible repayment options, wherein he can pay only the interest in the first six months and the regular EMIs can start post that. This helps the borrower manage his cash flow in a better way,” says Rahul Kalyani, vice president, partnerships, LoanTap, a personal loan app.

High interest rates

What comes in the guise of a holiday loan or a travel loan is, thus, actually, a personal loan. And since these are unsecured loans, they have a high rate of interest. Interest rates on such loans would start from 10.5%, but can go as high as 24% per annum, according to BankBazaar. The HDFC Bank website also mentions a similar interest rate range.

Since the tenure for personal loans range from 12 months to 5 years, for a loan of ₹1 lakh at 14% interest, one will need to pay an EMI in the range of ₹8,979 (for 12 months) to ₹2,327 (5 years). Higher interest rates would mean a higher EMI outgo.

The interest rates on these loans are determined by various factors. “First, credit score plays a significant role, as a higher score often leads to lower interest rates due to the lower risk associated with the borrower. Additionally, lenders consider the borrower's income level and debt-to-income ratio to assess their repayment capacity. Loan amount and term also affect interest rates, with larger amounts or longer terms potentially resulting in higher rates,” says Yashoraj Tyagi, chief business officer and chief technology officer at CASHe, a personal loan app.

The EMI can bite you for years to come

Taking a loan for a holiday means that you're going to remember your holiday for months if not years to come, and not for the reasons you would like to.

Let us take an example. Suppose you take a loan of ₹6 lakh to fund a Europe trip for your family at an interest rate of 14%. If you want to repay the loan over 3 years, the monthly EMI will be around ₹20,500. This means that over the next three years, you will have an EMI commitment of ₹20,000 over and above your other monthly expenses. If not planned properly, this can hurt. Missed payments would mean penalties such as late fees, and an adverse effect on your credit score.

Analyse your EMI-paying capability

“Only take a travel loan if you don’t have enough cash in your assets,” says Anuj Kacker, chief operating officer and co-founder of Freo, a neobank.

Before going for any personal loan like a holiday loan, it is important to take a close look at one's monthly expenses and financial obligations. “Understanding the debt-to-income ratio helps determine if the EMI payments can be comfortably accommodated within the existing budget. Performing a careful assessment of personal finances and creating a realistic budget that accounts for the EMIs can provide a clearer picture of whether the loan can be repaid without undue financial strain,” says Tyagi.

You may also seek the advice of a financial planner or use online EMI calculators to evaluate whether you can pay off the loan smoothly and then make an informed decision.

“Make sure your EMI is not more than 10% of your monthly income. Keep in mind that while the loan is available, be frugal where you can. Money which comes easily can be seen as free money and may be spent carelessly. Beware of that,” says Shweta Jain, chief executive officer and founder of Investography, a financial planning firm.

Keep in mind

It is important to take into account the complete cost of the loan, which includes the principal amount, interest rates and any additional fees. Conduct thorough research and compare offerings from various lenders to find the most favourable interest rates and loan terms that align with your requirements.

“Carefully read and understand the terms and conditions of the loan, including repayment schedules and any potential penalties for late payments,” says Tyagi.

Lastly, it is important to consider any possible changes in your financial situation and how they might impact your ability to repay the loan in the future. By being mindful of these factors, you can make a well-informed decision and enjoy your holiday without unnecessary financial strain in the years to come.