Aussie borders to open? Here’s how to fund your next holiday

With news of Australian borders soon opening for international travel, you might be looking at how to fund your next trip. With so many possibilities after more than a year of no international travel, it’s easy to get caught up in dream destinations and plans.

But it’s also easy to overspend when traveling overseas - the average Aussie spends about $4,750 on an overseas trip, research from Westpac finds. (Keep in mind that this number can vary significantly based on your budget and destination).

So, let’s look at ways to make this expense a bit easier to handle.

Should I get a personal loan or use my credit card?

If you want to travel and don’t have a large sum of money in your savings, you might be looking for easy funding. After all there are many costs to cover such as flights, accommodation, meals, car hire, travel insurance, spending money and more.

The question is, should you take out a personal loan or use a credit card?

Well the first thing to do is compare interest rates and see how they differ, generally speaking. We can start with averages. Using the averages you can begin to gauge what might be better for you financially - at least in the first instance. 

According to Mozo’s database, the current average interest rate on an unsecured personal loan is 9.56%. Meanwhile the average credit card rate is currently at 16.94%. Just by looking at the interest rates, going with a personal loan seems to be the better choice, but let’s break it down further.

While the average of an unsecured personal loan is 9.56%, there are some loans that have much lower starting interest rates. For example:

• Alex Bank Personal Loan (Unsecured Fixed) starts at 4.99% p.a. 
  
• Harmoney Unsecured Personal Loan (Fixed) starts at 5.35% p.a.
  
• OurMoneyMarket Low Rate Personal Loan (Fixed Unsecured) starts at 5.45% p.a.

You can find some low rate personal loans to fund your future holiday, however it is important to keep in mind that your credit rating and debt-to-income ratio may affect the final interest rate you get.

Credit cards have an average interest rate of 16.94%, but it is possible to find some with zero interest rates. While zero interest rates sound amazing, it is easy to forget the fine print such as monthly or annual fees, low credit limits, and the zero interest rate is actually an introductory rate that later converts to the proper interest rate. For example:

• American Express Platinum Card has a zero interest rate charge for 44 days, but it comes with a hefty $1,450 annual fee.
  
• G&C Mutual Bank Low Rate Visa Credit Card gives you 50 days of free interest that later converts to 7.49% with a $50 annual fee.
  
• Auswide Bank Low Rate Visa cards offer 55 interest free days before reverting to 8.05% with a $50 annual fee.

Unlike personal loans which can have their interest rate fixed for a couple of years, credit cards interest rate may fluctuate while you are trying to pay off your debt.

The pros and cons of a personal loan for travel

A personal loan can also suit a set budget. So if you know the exact financial commitment and timing around paying it off, this type of product can work. However, if your estimated spending budget is smaller than average and you can pay it off quickly, maybe consider getting a credit card instead.

The other thing to consider is whether your loan will be secured or unsecured. Most holiday loans are unsecured because a holiday is an intangible purchase, so to speak, and the borrowed amount is less likely to require a “secured” asset against it.

Pros of a personal loan:

• Generally approved and deposited into your account quickly.
  
• Have fixed interest rate and your repayment amounts will stay the same
  
• Ideal for trips where the destination is generally quite expensive ie. Japan or the USA.
  
• Gives you the freedom and flexibility to withdraw cash without massive cash advance fees.
  

Cons of a personal loan:

• Typically loans start at around $4,000, so the cost of your travel is relevant
  
• Much like any loan, approval and rates depends on your credit rating
  
• Personal loans for travel are normally unsecured loans

So it seems as though a personal loan can be a very smart way to approach the cost of a holiday, provided you are comfortable repaying the loan instalments and at a rate of interest that suits you. Although you’ll need a good credit score and to make sure you only for ask what you can afford. After all, you don’t want to be drowning in debt or fall behind on your repayments.

Remember, repayments are based on the full amount of the loan, related fees, the loan term and interest rates. When you set up the loan you will choose a weekly, fortnightly or monthly repayment schedule that suits you best. With a travel loan you also may feel more financially secured for your trip and maybe find yourself less likely to go over budget.

Thinking about what personal loan to use for your future travels? Check out some options on the table below.