How to make the most of a travel loan this summer

Tara McCabe

Tuesday 05 November 2019

As the old adage goes: “travel is the only thing you can buy that makes you richer”.

Woman and child next to the beach, on holiday.

And it’s true, travel can be a thoroughly enriching experience. But if you don’t have enough in your savings to cover your trip, and you’re thinking about taking out a travel loan, make sure you do it the smart way to avoid any financial heartache in 2020.

As Head of Strategy at Harmoney Dan York put it, “the biggest advantage of getting a loan to travel is really that you know how much you have to spend before you go, and you can plan accordingly.”

With that in mind, here are a few planning tips you could make use of, to get the most out of your travel loan.

Figure out your budget

So first things first, create a budget. Start by working out exactly how much you need to borrow, to cover all your travel expenses.

This includes airfares, accommodation and any other transport costs you might have when you get to wherever you’re going. Once you’ve figured out how much all of these essentials will cost you, you can start to work out the maximum amount you’re willing to spend on food, drink and other variable expenses such as the cost of attractions.

“It’s not a bad idea to come up with three budget amounts - the minimum amount you must have to travel, a second amount that will still make your trip possible, and a “nice to have” amount that will allow you to do everything you want,” York said.

Once you’ve been approved for a loan, you can start planning what kind of holiday you’ll be able to have. So for instance, if you’re approved for the minimum amount needed to make your holiday possible, you might have to tighten your financial belt and settle for that 3 star hotel. But if you’re approved for a bit more, the “nice to have” amount, you might be able to afford somewhere a little more luxurious to stay, say 5 stars.

People’s Choice Spokesperson Stuart Symons also suggested “allow for food and incidental travel costs - think about Uber, cabs and tips in countries like the US - which can be incorporated into the loan''.

Prepay big costs with your loan

As with any type of personal loan, travel loans can be useful to help cover larger, fixed costs, such as airfares and accommodation. And if you’re tossing up between using a travel loan or a credit card to finance your trip, one thing to remember is that travel loans often come with lower interest rates than credit cards.

So, for example, let’s just say you take out an unsecured, fixed interest rate travel loan of $30,000 to cover the cost of your family’s trip to Paris. 

  • The current average interest rate for this type of loan is 10.76%*, meaning that over the course of 3 years you would end up paying about $5,235 in interest and the total cost of your loan would amount to $35,235.
  • In comparison, the average interest rate for a credit card with travel insurance is currently 19.42%*. So if you racked up a $30,000 debt on this type of credit card, you could wind up paying approximately $9,818 in interest over the course of 3 years. In this scenario, the total cost of your holiday could come out at about $39,818. 

As Symons said, “credit cards are useful for small expenses; you don’t want to be incurring a higher rate interest on larger costs that you can spread over time on a personal loan at a lower rate of interest”.

So start off by prepaying large travel costs with the money from your personal loan.

Plan for smaller spending abroad

The next thing to think about is spending for smaller things, such as spontaneous souvenirs,  that you can’t preplan.

The money from your personal loan will come in a lump sum, so its a good idea to plan ahead and think about what might be the most cost-effective way to handle it. This means finding out exactly what ATM fees your bank might charge you for taking out cash in another country with your debit card, or what fee you might be charged for making a contactless payment in a shop.

Another option, according to York is to, “consider a prepaid travel card. It can help you stick to your budget, you can lock in the exchange rate and you can usually load multiple currencies on to one card.”

On top of that “try to pay in local currency. When paying by card you may be offered the choice to pay in your “home” currency or local currency. Retailers often use a less favourable exchange rate than your bank, so pay in the local currency and let your bank handle the conversion if you can”.

Have a plan to pay off your debt 

Finally, have a plan in place to pay off your debt when you return. 

This means knowing approximately what your regular repayments will be, plus any other fees that come with the loan. For this you can use Mozo’s personal loans repayment calculator to work out your approximate monthly repayments. Once you have an idea of how much you will be paying, you can factor this into your monthly budget and weigh it up against whatever other payments you might have. 

If you have other debts to handle alongside it, you might even want to think about consolidating your loan.

Consider a fixed rate personal loan for travel

On top of this, consider opting for a fixed interest rate personal loan, this way your interest rate should remain the same, meaning you will be able to predict more accurately what your future repayments will be.

So going back to the example of a $30,000 loan, paid back over the course of 3 years. At the average interest rate of 10.76%, you could be paying back about $979 a month. Of course, the repayment will vary depending on whether your interest rate is lower or higher and how much you borrow.

Check the fine print for any hidden fees or costs!

As Symons suggested, travellers should “always look beyond the interest rate to the fees and charges. The comparison rate should provide an insight, but it’s best to understand what it means for you and your circumstances”.

Factors such as upfront fees, late repayment fees and what kind of interest rate you get will all affect how much you end up repaying and should all be considered when taking out a travel loan.

You can compare interest rates and fees at Mozo’s personal loans comparison page. Or check out the deals below, to see how different loans compare.

*Average interest rates based on information available in the Mozo database, correct as of Friday 1st November, 2019.

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