Should I borrow to pay for my dream vacation?

Manish ShahI came across an advertisement that promised to take me and my family to Switzerland for a low monthly equated monthly installment (EMI) of under Rs. 12000 for 4 years. Tempting, to say the least. But, is it really worth paying an EMI for 48 months for a vacation that will last less than a month. In a study we conducted of 8000 users of our retirement tool on bigdecisions.com, we saw that 2014 was a tough year on account of inflation reflected by the consistently low spends on leisure and high proportion of total spends on essentials by these families. This certainly makes for a case to look at borrowing for a current leisure requirement, a little more closely. It’s a commonly held belief (including mine) that debt that aids asset creation or productivity enhancement is ‘good’ debt and that which does not, is not quite as good or ‘bad’ debt. Thing’s are not always this black or white but by and large, a loan that helps expand your business or build an asset like a housing loan are likely to help build your wealth versus a non-production or consumption loan is much more likely to bring you joy in the short term without much else. A vacation loan, for me falls squarely in this, second category. Here’s some food for thought

• Let’s say you really, really want a dream vacation (take the Swiss vacation mentioned above) and it costs Rs. 4,00,000 for a family of 4. Instead of paying an EMI of 12,000 for it for 4 years, why not save, Rs.8000 per month for 4 years (hopefully, with decent returns you will need a lot less) to be able to pay for it instead of borrowing?• ‘Good’ debt like a home loan typically cost in the range of 10-11%. Personal loans, the kind you will need to take if you want a loan for your holiday, come upwards of 14% and often go as high as 24% (higher still if you’re spending on your card with the intention of paying back in parts)• Apart from Personal Loans and Credit card payment plans you might sometimes be able to get packages or easy repayment deals from travel companies. While in some cases these plans might be attractive, in most cases, it’s an inflated price being paid back at a somewhat lower interest rate. In effect, it’s still a large amount in all to be paid. • While there might not be a significant impact on your credit score if you pay back high cost debt in time, missing payments on this kind of loan has a big, negative impact on your credit score• It’s not uncommon to have people taking high cost loans despite having money in a bank account or FD earning half the interest explained away as having enough ‘safety net’ just in case. There are several reasons why you need to borrow despite having planned for expenses like higher than expected education costs for your children or higher healthcare costs than anticipated. Does borrowing for a vacation really qualify as being similarly important? And if the vacation is important, as indeed it should be, why not plan for it in advance or go to a place that doesn’t cost that much – who says Himachal Pradesh or Kashmir aren’t as pretty as Switzerland ?The writer is a co-founder & CEO, BigDecisions.com.