Funding your dream vacation - Some options, their pros and cons

With a customer base of more than 1.7 crore members, IndiaLends, a fintech lender in 2023 saw that 50 percent of all credit card applications were for travel-focused credit cards. Also, loan applications for travel have increased two-fold.

Likewise, according to a survey of over 4,000 people conducted by Paisabazaar last year, 27 percent of consumers who took a personal loan between April and June 2023 took it for a vacation, as compared to 16 percent in the same period of 2022.

Looking at an emerging trend of borrowing for travel (holidays), Dev Ashish, Founder of StableInvestor says, “Travel is a discretionary expense and not exactly a critical one. So, if you can, then it’s wiser to save for it and then spend on it rather than spending on it and then repaying interest-bearing loans”.

Let’s deep dive into these lending options and understand the drawbacks and charges involved.

Personal (travel) loans from banks and NBFCs  

“Personal loans are a good fit if one needs a larger sum for travel,” says Gaurav Chopra, Founder and CEO, IndiaLends, a fintech lender.

Banks and NBFCs have stringent eligibility criteria. The turnaround time of personal loan disbursal usually ranges between two to four days. “Many lenders offer pre-approved personal loans with instant disbursal to their select existing customers having a strong credit history,” says Sahil Arora, Chief Business Officer (Unsecured Loans), Paisabazaar.

Interest rates typically range from 10.5 percent to 24 percent per annum, and processing fees can vary, which goes up to four percent of the loan amount. The tenure for personal loan can go up to five years.

Adhil Shetty, CEO of BankBazaar.com cautioned, taking a personal loan will push up the cost of your holiday by 10-15 percent on an average.

Credit cards with travel benefits

Credit cards provide convenient and flexible financing options with various benefits and rewards. They offer instant access to funds as per the credit limit on the card, allowing for seamless online and offline transactions. Users can get their card according to their choice and select the one that suits their lifestyle with perks like cashback, travel rewards, and discounts.

Among the most applied credit cards with travel benefits and rewards on the IndiaLends platform are Axis Bank Vistara credit card, American Express Platinum Travel card, and SBI ELITE credit card.

Chopra says, “With the growing popularity of travel-focused credit cards, it is crucial to manage credit cards responsibly, ensuring on-time payments and avoiding high balances to avoid potential debt and financial challenges.”

Also read | SBI Card launches 3 credit card variants in travel category with SBI Card Miles

Holiday now, Pay later scheme from fintech firms

Holiday now, pay later schemes are also as common as no-cost EMIs. These no-cost EMIs are everywhere, and holidays are no exception. You can use no-cost EMIs on credit cards to book high-value tickets and even entire trips. “This makes repayment easier and saves you a huge chunk of expenses,” says Shetty. Most credit cards have some such offers and are one of the most popular ways to fund your holiday.

“No-cost EMIs, however, are inexpensive and easy to access, as most travel websites offer them for ticket and hotel bookings,” says Shetty. For instance, if you spend Rs 1 lakh on a holiday, it will come to a little more than Rs 11,000 per month for a 9-month EMI. This means you have enough time to repay your expenses as well as have better liquidity at hand while traveling.

“Drawbacks of these schemes include the potential for high-interest charges post the no-cost EMI period and lack of standardised terms across fintech lenders partnered with the tours and travel company,” says Shavir Bansal, Founder and CEO of Kifaayat, a FinTech start-up.

Peer-to-peer lenders

Travelers are borrowing from peer-to-peer (P2P) lenders as well for travel purposes. “P2P loans may come with higher interest rates compared to traditional personal loans, especially for borrowers with poor credit or higher-risk profiles,” says Bansal. For instance, at RupeeCircle, a P2P lending firm, the interest rate ranges from 18 percent to 36 percent per annum. Similarly, at i2ifunding, a P2P lending firm, the interest rate starts from 12 percent, varying with the credit profile of the borrower.

Also read | Summer Holiday Packages: 6 tips to secure the hottest holiday deals

Credit card spending converted to EMI

Banks allow you to convert high spending on credit cards to EMI. One key parameter to consider is the interest rate, which can range from 15 percent to 18 percent per annum for such conversions. Additionally, there are processing fees involved, typically around two to three percent of the transacted amount. These costs add to the overall expense of converting spending to EMI.

Another important point is that when you convert a purchase to EMI, the transacted amount gets blocked against your credit limit until the EMIs are paid off. “This temporarily reduces your available credit limit on the card, and any new purchases will utilise the remaining credit limit,” Bansal explains. This can increase your credit utilisation ratio (CUR), which is the percentage of your available credit that you're using. A CUR over 30 percent can negatively affect your credit score, Bansal adds.

Also read | Airmiles and frequent-flier programmes can get you free tickets, but not everything is free

What travelers should ideally do?

Before borrowing money for holiday expenses, it's wise to consider additional strategies to boost your income and savings. “Exploring options like weekend jobs of your expertise can be more beneficial than taking on the responsibility of repaying a personal loan with interest over several months or years,” says Bansal.

You can look at putting in place a rolling travel corpus that continuously gets funded from your monthly savings. You can withdraw money from this corpus periodically whenever you wish to travel. “For this, you can look at investing in recurring deposits, liquid funds, arbitrage funds or conservative hybrid funds,” says Ashish. When you do this, you will periodically save up funds to fund your dream vacations.

And in some years, you may not need to withdraw (as you may not be traveling much). In such years, the travel fund would keep getting bigger to fund your larger travel expenses, such as international travel.

You can also use your credit card reward points to offset flight and hotel expenses.

“However, those who are willing to take a loan to fund their holidays should choose an option with the least interest outgo and ensure they repay the loan with discipline,” says Arora.