The flights are $2,500. Accommodation is another $3,000. Add food, insurance, transport and spending money and suddenly the holiday you were planning costs $8,000.
You have $3,000 saved.
Do you wait another year or borrow the difference and go now?
There is no automatic right answer.
Borrowing for travel can make sense when the trip has a fixed date, the repayments comfortably fit your budget and you have worked out exactly what the loan will cost. It makes considerably less sense when borrowing is the only way you can afford the trip and the repayments will still be causing problems long after you get home.
The holiday lasts two weeks.
The debt might last two years.
That is the part to think about before you book.
What is a travel loan?
A travel loan is generally a personal loan used to pay for a holiday or other travel costs.
You borrow a fixed amount and repay it over an agreed term with interest.
The money can typically be used for expenses such as:
- Flights
- Accommodation
- Cruises
- Tours
- Rental vehicles
- Travel insurance
- Honeymoons
- Destination weddings
- Visiting family overseas
- Domestic travel
- Spending money
Unlike travel finance tied to a particular airline or booking company, a personal travel loan normally gives you the funds and lets you make your own bookings.
When can borrowing for travel make sense?
There are situations where waiting another year is not particularly practical.
The trip has a fixed date
A family wedding in Fiji is not moving to next year because you have not finished saving.
The same applies to a reunion, honeymoon, major birthday or family event.
If you already have part of the cost saved and only need to finance the gap, borrowing a manageable amount can be very different from financing the entire trip.
You have predictable income
A fixed personal loan is much easier to manage when you know exactly what income is coming in and the repayment comfortably fits alongside your normal expenses.
If the loan repayment leaves enough room for rent or mortgage payments, food, utilities, existing debts and savings, the borrowing is easier to plan around.
You can repay it relatively quickly
The shorter the loan term, the less time interest has to build up.
Borrowing $6,000 for a trip and clearing it within 18 months is a very different financial commitment from paying for that same holiday over five or seven years.
Match the loan term to the purchase.
A holiday should not still be appearing on your bank statement several holidays later.
When is borrowing for a holiday probably a bad idea?
A personal loan can get you on the plane.
That does not mean you should take one.
There are several warning signs worth taking seriously.
You are already struggling with existing repayments
If credit cards, personal loans or other debts are already taking a substantial chunk of your income, another loan adds another fixed commitment.
The holiday might provide two weeks away from the problem.
The repayment will still be there when you come home.
You have no emergency savings
Coming back from Europe with $10 in your account and a new loan repayment is not a great financial position.
Cars still break down.
Dental bills still happen.
Power bills still arrive.
Do not spend every available dollar on the trip and leave nothing behind for normal life.
You need a very long loan term to make the repayment affordable
This is one of the clearest warning signs.
If the only way an $8,000 trip looks affordable is by stretching it over six or seven years, the trip itself may be outside your current budget.
A longer term reduces each repayment.
It also increases the amount of time you are paying interest.
Saving first is still the cheapest option
If the trip can wait and you can comfortably save the money, paying cash normally wins.
There is no loan interest.
There are no establishment fees.
There is no repayment waiting for you after the holiday.
Saving also gives you a useful reality check.
If you plan to take out a loan that would cost $300 a fortnight, try putting $300 a fortnight into a separate savings account first.
If that feels comfortable, you are building the holiday fund.
If you repeatedly need to take the money back out to cover ordinary expenses, that tells you something important about whether a $300 loan repayment would really fit.
Personal loan or credit card for travel?
This is where borrowing methods matter.
Putting an entire trip on a credit card can be expensive, particularly if you only make minimum repayments.
Credit cards are revolving debt. There is no fixed point where the balance automatically disappears.
A personal loan works differently.
You borrow a fixed amount, have scheduled repayments and know the date the loan should be finished.
Travel loans through Lending Room currently have rates ranging from 8.99% to 29.95% p.a. (AIR), with unsecured rates starting from 10.99% p.a. Your actual rate depends on your credit profile, loan amount, term and whether security is involved.
A personal loan can therefore be cheaper than carrying travel costs on a high-interest credit card, but that depends entirely on the actual rate and fees you are offered.
Compare the numbers.
Do not assume one form of credit is cheaper.
What about an interest-free credit card?
A genuine interest-free period can work if you know the full balance will be cleared before interest begins.
That last part matters.
Putting $4,000 of flights on a card with an interest-free period and clearing the entire balance within that period can cost very little.
Putting $4,000 on the card, reaching the end of the promotional period with $3,000 still outstanding and then paying standard credit-card interest is a different situation.
The question is not whether the credit starts interest-free.
It is whether you will actually clear it while it is interest-free.
How much should you borrow for travel?
Start with the complete trip budget.
Not just the flights.
Include:
- Accommodation
- Transport
- Food
- Activities
- Travel insurance
- Visas where required
- Baggage costs
- Airport transfers
- Spending money
- A contingency amount
Then subtract what you already have saved.
That is closer to the amount you actually need.
If the trip costs $10,000 and you have $6,000 available, borrowing $4,000 is very different from keeping the $6,000 untouched and borrowing the full $10,000.
Every extra dollar borrowed costs money.
Borrow for the gap, not simply for the maximum amount available.
Do the total-cost test
Before accepting a travel loan, ask one question:
How much will this trip cost me after the finance is included?
Suppose the holiday itself costs $8,000.
Once loan interest and fees are added, you might ultimately pay substantially more than $8,000.
That extra amount is part of the holiday cost whether it appears on the hotel invoice or not.
Compare:
- Amount borrowed
- Interest rate
- Establishment fees
- Broker fees
- Loan term
- Regular repayment
- Total interest
- Total amount repayable
Do not choose the loan because the weekly number looks small.
A small repayment over a very long period can be an expensive way to buy two weeks overseas.
Consider what you need to borrow for next
This gets missed surprisingly often.
Taking on a travel loan does not only affect your travel budget.
It becomes part of your financial commitments.
If you plan to apply for a mortgage, replace your car or take on another major expense shortly afterwards, the existing loan may be taken into account when a lender assesses what you can afford.
That does not mean nobody should borrow for travel before buying a house.
It means you should understand that taking on debt reduces the amount of income available for other repayments until that debt is cleared.
If another major borrowing goal is six months away, delaying the trip or reducing the amount borrowed may be worth considering.
Do not forget travel insurance
Travel insurance belongs in the budget before you leave, not in the list of optional extras you buy if money is left over.
SafeTravel, the New Zealand Government’s official travel-advice service, recommends travel insurance for overseas trips and warns that the Government will not cover overseas medical bills for you.
Check that the policy covers:
- Your destinations
- Medical treatment
- Activities you plan to do
- Existing medical conditions where relevant
- Cancellation
- Travel disruption
- The full length of the trip
If you need to borrow an extra few hundred dollars to include appropriate insurance in a $10,000 international trip, include that cost when working out the real budget.
A simple test before borrowing for travel
Before applying, see whether you can answer yes to these questions:
- Do I know the full cost of the trip?
- Have I already contributed some savings where possible?
- Can I make the repayment comfortably from normal income?
- Do I still have money available for emergencies?
- Can I repay the loan within a sensible timeframe?
- Have I compared the total cost with other ways of paying?
- Will this loan interfere with another major financial goal?
- Have I included travel insurance in the budget?
The more no answers you have, the more useful it may be to adjust the trip rather than adjust the loan.
A cheaper destination, shorter stay or another few months of saving can change the numbers considerably.
How Lending Room handles travel loans
Lending Room is a registered finance broker rather than a direct lender.
Instead of applying separately to multiple finance companies, one application allows us to assess your circumstances against a panel of vetted lenders.
Our initial assessment uses a soft credit check, so our check does not affect your credit score.
Travel loans through Lending Room range from $3,000 to $250,000 over terms from 6 to 84 months.
Secured rates currently start from 8.99% p.a. (AIR), with unsecured rates starting from 10.99% p.a. Rates range up to 29.95% p.a. depending on your credit profile, loan amount, term, security and lender criteria.
If you have already priced your trip and want to understand what the remaining amount would cost to finance, get in touch with the Lending Room team. We can assess the options available and give you the rate, fees and repayment structure before you decide whether borrowing makes sense.
Frequently asked questions
Is it a bad idea to take out a loan for a holiday?
Not automatically. It depends on the amount, interest rate, repayment term and your financial position. Borrowing becomes much harder to justify if repayments stretch your budget, you already have significant debt or you need a very long term to make the trip affordable.
Can you get a personal loan for travel?
Yes. Travel loans are generally personal loans being used for a holiday, honeymoon, family trip or other travel expense.
Is a travel loan better than a credit card?
It can be. A personal loan gives you fixed repayments and a clear end date, while credit-card debt can remain outstanding indefinitely if you continue making only small repayments. Compare the actual interest rate, fees and total cost of both options.
How much can I borrow for a holiday?
Lending Room’s lender panel currently offers eligible travel loans from $3,000 to $250,000. The amount available to you depends on your income, expenses, existing debts, credit profile and lender criteria.
Should I borrow the whole cost of my trip?
Not necessarily. If you already have savings available for the trip, borrowing only the shortfall reduces the amount on which you pay interest.
How long should a travel loan be?
Use the shortest term that produces a repayment you can comfortably afford. Longer terms lower the regular repayment but increase the time interest is charged.
Can I apply for a travel loan before booking?
Yes. You do not need to have every flight and hotel booked before checking your finance options through Lending Room. Knowing your realistic borrowing limit and repayment first can make it easier to set the travel budget.
This article is for general information only and does not constitute financial advice. Lending Room is a registered financial services provider (FSP486566). We are a broker and do not lend directly. Rates range from 8.99% to 29.95% p.a. (AIR). Secured rates start from 8.99% p.a. and unsecured rates from 10.99% p.a. Establishment fees up to $450 and broker fees up to $1,500 may apply. Your rate and approval are subject to lender credit criteria.