Factors to Consider When Availing Personal Loan for Vacation
Before taking a personal loan for travel, there are a few things you should keep in mind.
- Interest rate
The interest rates for personal loans for travel usually start from 10.49% p.a. and some lenders may offer lower interest rates to their existing customers. The final rates offered to applicants can vary from one lender to another depending on their creditworthiness. Therefore, make sure to always compare the personal loan interest rates offered by different lenders to find the best loan offer for your travel plans.
- Repayment tenure
Most lenders offer personal loans for minimum tenures of 6 months and maximum tenures of 5 years. However, some lenders offer personal loans for longer tenures. For example, the minimum and maximum tenure for SBI Personal Loan are 6 months and 6 years respectively. Similarly, the maximum tenure for PNB Personal Loan and Indian Bank Personal Loan is 7 years. Incase of Tata Capital Personal Loan, the maximum loan tenure can go up to 6 years.
Longer repayment tenure means lower monthly payments but this way, you will end up paying more interest cost over the course of your loan. To avoid this, make sure to choose the repayment tenure that fits into your budget.
- EMI affordability
Lenders usually sanction personal loans to applicants whose total EMI obligations, including that of the proposed personal loan, does not exceed 50-60% of their total income. Therefore, if you are planning to avail travel loan, you can consider using Paisabazaar’s Personal Loan EMI Calculator to find out the optimum EMIs and loan tenures for your personal loan based on your repayment capacity to ensure your total EMIs stays within 50% of your net monthly income.
- Processing fees
The processing charges for personal loans can go up to 4% of the loan amount, depending on the lender. However, some lenders have capped the processing fee, regardless of the loan amount. Many lenders also waive off the personal loan processing fee during festive seasons. While the processing fee is a one-time charge, it increases the overall cost of availing loan. Thus, those planning to avail personal loans should compare the processing fees charged by different lenders, even if they are offered a personal loan at a low interest rate.
- Prepayment charges
You should also know that the RBI has barred lenders from levying a prepayment fee on personal loans lent on floating interest rates. However, there is no such restriction on personal loans availed on fixed interest rates. Most lenders charge a prepayment penalty of up to 5% on the outstanding principal amount. At the same time, many lenders also restrict personal loan borrowers from making prepayments until the repayment of some pre-decided EMIs. Thus, those planning to avail personal loans while keeping the options of prepayment open, should compare the prepayment charges of various lenders and then, choose the one that charges nil or lower prepayment charges with least restrictions.
- Credit score
Your credit score plays a crucial role in determining the interest rate you will get on your personal loan. A higher credit score usually means a lower interest rate. So, make sure to maintain your credit score of at least 760 or more and take steps to improve it, if necessary.
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Pros of Taking a Personal Loan for Travel/Vacation
- Quick disbursal
Lenders usually disburse the personal loan amount within 2 to 4 days. However, lenders using an end to end digital onboarding process for their personal loan applicants have started offering digital personal loans with quicker disbursement than personal loans offered through offline mediums. Many lenders also offer pre-approved personal loans to their existing customers with good credit profiles. These loans have instant or near instant disbursals.
Personal loans are unsecured in nature, which means borrowers do not have to pledge any collateral/security to avail these loans.
- No-end usage restrictions
Personal loans come with no-end usage restrictions. This means, you can use your personal loan or holiday loan proceeds to pay for all or any type of travel-related expenses including visa fees, flight tickets, accommodation, local commute expenses, taxi fares, sightseeing tickets, shopping, food, etc.
- Lower interest rates than credit cards
Personal loan interest rates range between 10.49% to 24% p.a. Credit card interest rates, on the other hand, usually start from 40% p.a. Even the interest rates of credit card EMI conversion and loan against credit are usually higher than the personal loan interest rates offered to the same individual. Thus, availing personal loans would be a more affordable option for travel or holiday financing compared to credit cards.
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Cons of Taking Personal Loan for Travel
Higher interest rate than secured loan options
Even though personal loans offer lower interest rates than credit cards, the personal or holiday loan interest rates are usually higher than secured loans options like gold loan, loan against property, loan against securities, etc. This is because the availability of collateral in secured loans reduces the credit risk for the lender, which in turn passes the benefit to the borrowers in the form of lower interest rates.
Some of the secured loan options also beat other personal loans features because of their longer tenure, bigger loan amount and higher EMI affordability. Because these loans are secured, the impact of credit score during the loan review process is also reduced, which further increases the chances of availing loans for borrowers with low credit scores.
Prepayment charges & foreclosure restrictions
Along with the interest component, personal loans also come with prepayment charges and foreclosure restrictions. While the RBI has barred lenders from charging prepayment fees on floating rate personal loans, there is no such restriction on fixed rate personal loans. Most lenders charge up to 5% of the outstanding principal amount of personal loan, which can increase the overall cost of the loan. Many lenders also restrict personal loan borrowers from making part-prepayment or foreclosure until the payments of some predetermined EMIs.