Questions You Need to Ask When Taking Personal Loan for Vacation

Nothing quite like a vacation with your loved ones.

(Photo: iStock)

In this day and age of social media, people have started choosing exotic destinations to satiate their wanderlust. From trekking adventures in Spain to peaceful stays in Thai resorts, their bucket lists are overflowing with new holiday locations. However, funding an international trip is not as easy as selecting a destination. As a result, many travel plans remain unrealised because of lack of money.

One of the viable options for those who do not have enough savings for that exotic vacation is a personal loan. It allows you to borrow from the bank and the best part is that the lending institution does not monitor how you use the loan proceeds. Being an unsecured loan, it does not require you to submit any asset as collateral. Although personal loan interest rates are considered as one of the highest, they can be a big help for funding your vacation, if handled responsibly.

But before you take out a personal loan for vacation, make sure you weigh the pros and cons and take a decision that best suits your current financial position. Ask yourself the following questions before signing on the dotted line.

Do I really need a personal loan to fund my vacation?

This should definitely be the first question you ask. Your ability to handle a personal loan depends on your current financial situation and the growth you expect in future. You should also assess your vacation budget to find how reasonable it is in the current financial scenario; whether you can afford the cost of an exotic location, flight tickets, five-star hotel and the adventure sports you look forward to trying. If you find your holiday budget to be reasonable, the next thing is to take a good look at your savings and emergency funds. You should not take a personal loan if you think your extra savings can suffice for the cost of your holiday expenses. However, do not exhaust all your savings for a vacation. A personal loan makes sense only if you don’t have enough savings but your earnings can support extra EMI expense.

How much extra money will I have to shell out every month and can I manage it?

This depends on the rate of interest at which you will get your personal loan. Before selecting a lender, you must shop around for a lower interest rate along with better terms and conditions. Since a vacation is planned in advance, you should take some time to build a better credit score which will help you negotiate a better rate of interest. Also, understand the EMI burden which will be added to your monthly expenditure. For example, if you are already paying EMIs towards multiple credit cards, you should make a plan about how to fit an extra EMI into it.

How is the interest calculated?

Interest on personal loan is calculated by two methods- reducing balance method and flat rate method. Under the flat rate method, you have to pay a fixed amount as interest per month whereas in case of reducing balance, interest will be calculated on the outstanding principal left at the end of each cycle. Lenders who use flat rate method usually offer loans at much lower rates because the effective rate of interest is much higher in that case. You must talk to your bank about the method of interest calculation to make your vacation less of a financial burden.

By taking a personal loan, you can enjoy the vacation of your dreams.(Photo: iStock)

What are extra charges that I will have to pay?

Interest is not the only cost associated with personal loans; other charges like processing fee and pre-payment charges etc also make up for the hidden cost. Compare the extra charges from different lenders using a personal loan EMI calculator and choose the one that offers a reasonable interest rate along with lower hidden charges. For example, a lender might be offering you lower rate of interest but the terms may be stricter and if you delay EMI payment it will not take long to drown you in debt. On the other hand, there is a bank that charges just 1 percent higher rate of interest but it does not levy any penalty for prepayment of loan. It is better to go with the latter.

Can I foreclose the loan before maturity?

Foreclosure charges should also be considered when taking a personal loan. This is charged as a percentage of the total outstanding amount that you pay before maturity. In future, if you get a good raise or make a windfall gain from your investments, you would like to make part-payment towards your personal loan or foreclose it in advance. But if pre-payment comes with huge charges, it would not be equally profitable.

Is it better to go for a secured loan than a personal loan?

It is always in the borrower’s interest to learn about the alternatives because however easy it may be to score a personal loan, it comes with an interest cost that is higher than most other loans. So if you have an asset to spare as collateral, you should give secured loans a thought. Gold loan can be a good alternative to personal loan as the interest cost is lower and the processing time of gold loan is also quicker. Most of the Indian households have gold in the form of jewellery which is accepted by the banks.

Another worthy alternative to personal loans is loan against fixed deposits. If you already have an FD with your bank and need urgent cash, you can avail a loan against your deposits. The LTV in this case may range between 75 to 85 percent and the rate of interest is usually 1-2% higher than what the bank is providing you as interest on fixed deposit. Top up home loan or loan against insurance policies can also give you a lower rate of interest.

These questions make sense the most if you have already decided to travel the world by taking a loan. What experts suggest is that loans should never be used for discretionary expenses. Taking an exotic vacation will tick an item off your bucket list but is it worth paying EMIs for the next 2-3 years? The answer to this question will vary from person to person based on their financial condition and life goals. Set your priorities and then look forward to taking a vacation loan.