Should you fund your trip with a personal loan? The truth you need to know

Personal loans: If you plan to take out a personal loan, it is essential to note that it should be used for a significant purpose. Some of the key reasons for taking out a personal loan include an emergency, home renovation, tuition for higher education, and hosting an important event such as a wedding or reception.

Most of these expenses are unavoidable, and therefore, it is not uncommon to take out a personal loan for any of them.

Meanwhile, it is recommended to refrain from taking out a personal loan for avoidable expenses such as going on a trip or indulging in a recreational activity.

Avoid personal loans for travel for these reasons

1. Higher interest rate: A personal loan is an unsecured loan, and therefore, it typically has a higher interest rate. Therefore, you end up paying far more than the money you took as a loan.
2. Impact on credit score: When you take too much of credit, it may adversely affect your credit score especially if it is more than your monthly income can easily repay.
3. Inculcating a bad habit: When you get into the habit of taking out a loan for something as insignificant as travel, your tendency to take out a loan will naturally increase manifold. So, it is recommended to raise the loan only when it is absolutely essential.
4. Use of a credit card: Travel costs primarily include hotel and flight bookings – both of which can be easily paid via credit card. Therefore, there is no compelling reason to opt for a personal loan over a credit card.

However, you may still consider taking a personal loan for travel when one of the following takes place:

1. Too important to cancel: Travel plans were made long ago with the people who matter a lot, for example, your school friends. And it so happens that you are currently low on your bank balance, but your financial situation is expected to improve within a month or two.
2. Meeting the deficit: It entails an exotic trip, and you are short of funds by only 10-20% of the total travel cost. For example, when you are scheduled to spend ₹3 lakh on a trip to Europe, but you are short of ₹30,000. Taking a small personal loan for a few months won't do much harm for a trip which can't be postponed.
3. Key event: When the travel is primarily meant for an important conference or event, which will provide good networking opportunities and will be beneficial for your work in the long run.

What are the interest rates on travel loans?

The interest rates on travel loans depend on several factors, including your credit score, loan amount, income, and past repayment history.

Rates generally start at about 10.75 per cent per year, though the final rate varies from lender to lender. Most banks and NBFCs offer travel loans up to 40 lakh rupees with repayment tenures of up to six years, as per BankBazaar. Also, pay attention to the processing fee, which can go up to a little over four per cent of the loan amount.

How is the EMI for a personal loan for travel calculated?

The EMI (Equated Monthly Installment) for a travel personal loan is calculated using the standard formula:

EMI = [P × r × (1 + r)^N] ÷ [(1 + r)^N − 1]

Where:

• P is the principal loan amount.
• r is the monthly interest rate (annual interest rate divided by 12).
• N is the loan tenure in months (total number of EMIs).

By writing in the loan amount, interest rate, and tenure into this formula, you can calculate the monthly EMI you need to pay.

In conclusion, it is better for aspiring borrowers to understand these risks and complications of personal loans before going ahead with borrowing for meeting travel requirements. It is always prudent to sit down with certified financial advisors and borrow in accordance with one's long-term financial goals and aspirations.

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