Should you go for a travel loan to fund your dream trip?
If you are planning a trip and have not saved up for it, a travel loan could be the solution. After all, who does not want to travel? But a loan taken needs to be repaid and as we saw in the previous article, travel loans come with high interest rates. Read on to find out whether a travel loan makes sense for you and what you should consider before going for one.
When to go for a travel loan? To some of us travel experiences mean a lot than that expensive gadget or some other finer things of life. When you are planning a trip and have no savings earmarked for it, you may go for a travel loan. It is cheaper than funding your trip through a credit card as you will end up paying much higher interest if you do so.( Interest paid on credit card debt can be as high as 36 per cent per annum). Also, you may not want to break your long term savings to fund a trip. But having said that, it is still an expensive loan, and you have to pay regular EMIs over the next few years, which would somewhere mean that you cannot plan another trip till then. You can sponsor your travels or a part of your travels through a loan, but remember that it is never a wise financial choice. If possible postpone your trip for a couple of years and save up instead. I mean you should always plan financially for big trips in advance. It also helps you get the best deals on flights and hotels.
How to calculate the EMI? Like any loan, once you have taken it, you have to repay the loan through EMIs. Getting a hang of the EMI outgo is important since you have to plan your finances accordingly. The EMI will naturally depend on the amount of loan, the interest rates and the tenure of the loan. You can use any EMI calculator on the Internet or any bank / lender website to get a quick idea on your EMI outgo. If you take a loan of ₹ 6 lakh at 14 per cent interest you would need to make a payment of ₹ 13,961 every month for 5 years to pay off the loan. You pay ₹2,37,657 as interest. So you effective cost of the trip is about 8.4 lakh.
For a 3 year period, the EMI comes to ₹ 20,507. If the loan amount is ₹ 10 lakh, the respective EMIs are ₹ 23, 268 and ₹ 34,178 . The interest you pay is ₹3,96,095 and Rs 2,30,395 respectively.
What do you need to keep in mind? Remember that EMI you arrive at will be alongside all other financial commitments that you already have, including loans for homes, cars and gadgets. YOU SHOULD NEVER pay for than 40 per cent of your income on all EMIs together. If you already have other loans to service or are planning to take one in the future it is even more important to keep the EMIs at manageable levels. Otherwise you may have to cut corners or end up in a financial mess. That is not something that you do not really want. So it is best to plan in advance for those expensive foreign trips. Go for a travel loan, only and only if you are confident of paying off your EMIs without putting undue strain on your finances.
The bottom line- loans are available for your travel needs, but consider all the above before using a loan to fund your travel.