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Business News/ Money / Considering taking a personal loan to fund your dream vacation? Here are its pros and cons

Considering taking a personal loan to fund your dream vacation? Here are its pros and cons

Contemplating a personal loan for travel can be enticing, particularly if you're looking to fund your dream vacation in the future.

Taking out a personal loan for travel has its pros and cons.Premium
Taking out a personal loan for travel has its pros and cons.

Personal loans are loans that are not secured by collateral, such as a car or house. This makes them versatile for a variety of purposes, including travel. The following are some factors to consider before taking out a personal loan for travel:

  • Check how much you need: Creating a comprehensive budget is essential before obtaining a personal loan for travel. Maintaining a 10-15% buffer is crucial for several reasons, including unexpected fees that can arise during travel, such as baggage fees, international transaction fees on credit cards, or resort charges. Additionally, it’s always prudent to plan for the unexpected, such as a lost passport or a minor illness requiring medical care. You might come across the perfect handcrafted souvenir or encounter an unforgettable activity that you’ll want to indulge in.
  • Interest rates: Personal loans often come with higher interest rates compared to other loan options like home equity loans or credit cards with low introductory APRs. As a result, you may end up paying more in interest over the loan’s duration. A lower APR translates to a reduced overall cost for the loan. Therefore, it’s important to select a lender that offers competitive rates and flexible repayment terms that align with your budget. Ideally, opt for a loan term that enables you to comfortably pay off the loan before your next vacation.
  • Repayment: You’ll need to make monthly payments on the loan, which will include both the principal amount and interest. Make sure you can comfortably manage these payments along with your other regular expenses.

Once you’ve selected a lender, it’s time to apply for a personal loan. Complete the application form and submit all required documents, including proof of income, identification, and address. The lender will assess your application and credit score to determine your eligibility for the loan.

Utilising a personal loan can be a method to fund your travel, but it’s not the sole option. It’s essential to explore other alternatives that might better suit your circumstances. Explore other ways to fund your trip, like saving in advance, using a travel rewards credit card, or seeking out travel promotions and discounts. Deciding whether to use a personal loan for travel is a personal choice. Carefully consider the advantages and disadvantages to determine if it’s the best option for you.

Frequently Asked Questions (FAQs)

Q. What documents are needed for a personal loan application?

The eligibility requirements and required documentation for a personal loan differ between salaried employees and self-employed professionals. Before applying for a personal loan, it’s recommended to verify your eligibility.

Most financial institutions typically ask for the following documents when applying for a personal loan

For salaried employees

  • Application: Completed application form with a photograph attached
  • Proof of identity: A self-attested photocopy of one of the following:
  • Driving license
  • Passport
  • Voter ID
  • Aadhaar card
  • PAN card
  • KYC requirements: You need to provide the necessary KYC documents, including valid proof of identity, residence, and signature.
  • Income proof: Submit Form 16 or ITR for the past three years and the most recent three months’ salary slips.
  • Banking details: Provide the latest three months’ salary credit bank statement.

For self-employed individuals

If you are a self-employed professional, you will need to provide the same documents as a salaried employee. However, the banking requirements may vary in this case.

- Banking details: Provide the most recent six months’ business current account statement and the latest three months’ primary savings account statement.

Some loan providers offer a completely digital application process without the need for physical documentation or income proof. This streamlines the personal loan application process and facilitates a fast and efficient disbursal process.

Q. Is it possible to take out a personal loan for medical expenses?

You can utilise a personal loan to handle your medical expenses, particularly if you lack health insurance. It can assist in:

  • Settling medical bills when you don't have insurance
  • Covering medical costs at hospitals not included in your insurance coverage
  • Financing costly cosmetic procedures
  • Meeting the expenses of prescription medications
  • Paying for dental treatments not covered by insurance

Q. Should you take a personal loan to fund travel?

The optimal approach to determining if a personal loan suits you is by evaluating your financial status and travel objectives. If you possess a good credit score and a robust repayment strategy, a personal loan could be a suitable choice. However, if you have reservations about accumulating debt or high interest rates, it's advisable to investigate alternative financing solutions.

Q. What are the disadvantages of using a personal loan to fund your travels?

The main disadvantages include higher interest rates and increased debt load. Personal loans often come with higher interest rates compared to travel credit cards, and taking out a loan adds to your financial commitments. Additionally, there's a potential risk of overspending due to the easy availability of cash.

Q. What criteria do lenders typically evaluate when approving a personal loan for travel?

Lenders examine your credit score, income, employment record, and debt-to-income ratio to gauge your repayment capability for the loan.



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Published: 04 Apr 2024, 11:24 AM IST
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