Travel loans better than using credit cards

Do the cost-benefit analysis before going for it. Personal loans may be cheaper in some cases

You could have diligently planned for a holiday in Mussoorie this summer, and even saved for it. But plans do go awry. Maybe the family isn’t happy with the destination or you feel like giving a treat to the family by taking them abroad. The new plans would require additional funding. 

There are various options: The simplest one is swiping your credit card (if you have the required balance); or you could sell some investments (shares or mutual funds). You could opt for a personal or even a travel loan. 

Selling some investments, if you are sitting on profits and the sale does not attract short-term capital gains, would be the ideal way to fund the journey. Even a personal loan, at 13-14 per cent currently, would be a good way. But if both these options don’t work out, you can avail a travel loan.  

Fintech companies such as Loantap and CoinTribe have recently launched travel loans. “It is a consumption loan similar to loans for consumer durables like television, etc. Since the end-use is travel, we ask for the visa as proof after the loan has been disbursed. For ones who are seeking a loan for domestic travel, they can show proof of resort booking and so on to get the loan,’’ says Satyam Kumar, co-founder Loantap.

According to Kumar, while mature consumers save money for a holiday, those between 26-35 years tend to use their credit card. And since they find it difficult to repay the amount at one go, they tend to revolve the credit card outstanding. But this means having to pay high interest rate, anywhere between 24-48 per cent annually. Another option is to use your credit card and convert that into equated monthly instalments (EMIs), which is possible at the time of the transaction itself. That means blocking your credit card limit. Thus you require multiple cards, if you are an avid card user.

In comparison, the interest rate charged by Loantap is 18 per cent annually (on reducing balance), which is slightly higher than personal loans rates charged by banks. 

“For the first two or three instalments, a customer has to repay only the interest component of the loan. After that the customer has to pay both principal plus interest. This reduces the burden on the customer and also saves him from the penalty of not repaying on time,” says Kumar. The minimum amount is Rs 1 lakh and the maximum is Rs 5 lakh. Typically, customers borrow Rs 1.5-2 lakh and repay in nine to 10 instalments. 

“One strategy customers should follow while taking a travel loan is to keep the amount restricted to how much you can tolerate for the next 12 months, says Manish Chaudhari, co-founder and Chief Risk Officer, CoinTribe. 

CoinTribe charges between 11.5 and 15 per cent (on reducing balance) depending on the customer’s profile. The tenure of the loan varies from one year to up to four years, depending on where the customer is working. In exceptional cases, the loan tenure can be extended to five years. 

In case you want to pre-pay the loan, Loantap allows up to 25 per cent of the principal to be paid immediately after you return without any penalty. Beyond that there is charge of four per cent. CoinTribe charges three-five per cent of the outstanding loan amount as pre-payment penalty. Travel companies also have tie-ups with lenders to offer holiday packages on EMIs. 

For instance, Cox and Kings and Thomas Cook India have tie-ups with Bajaj Finserv, while Thomas Cook also has a tie-up with Tata Capital to offer personal loans for holidays. For customers opting to pay for their holidays or travel through the no-cost EMI Bajaj Finserv card, there is small processing fee charged by Bajaj Finance but it is an interest-free loan.

EASY HOLIDAYS

• Rates on holiday loans vary between 11% and 18%, depending on customer profile
• Travel loan is better than using credit card if you cannot afford to pay at one go because of the high interest and penalty 
• Since these are consumption loans, repay them within one year to reduce your interest burden
• Travel companies offer holiday packages on EMIs but the choice could be restricted 
• Pre-payment can attract penalty in some cases  
• It is better to plan your holiday and save money for it