Is a personal loan or credit card better for travelling?

From the crystal clear waters of Halong Bay in Vietnam to the hustle and bustle of Istanbul’s Grand Bazaar, the world has plenty to offer any avid jetsetter. So if you’ve got the traveller’s itch and can’t wait to head off on your next adventure, it’s time to think about what will be the best way to fund your great exploration - a travel loan or credit card.

A travel loan is just like any other personal loan where you borrow a set amount of money to use towards funding an upcoming expense, in this case your holiday. When you take out the loan you’ll agree to the provider's conditions, including paying interest and any associated fees (e.g upfront and ongoing fees) and you will pay it back over an agreed timeframe.

• Example: Lynda is planning a European trip for 2 months and estimates she will need around $10,000 to cover everything from her Contiki tour to internal flights. If she takes out a travel loan with a 10.00% fixed interest rate that she will pay back over 2 years, our personal loan repayments calculator shows her ongoing monthly repayments would be $461 and she would pay $1,075 in interest.

A travel credit card has features to help you save money while abroad. Generally these features include a competitive foreign exchange fee, rewards bonus points per dollar spent on overseas transactions and complimentary features like travel insurance. The great thing about credit cards is they come with interest free periods (around 44 to 55 days), so if you’re able to pay the balance back in full before the due date you can use the card without the slap of interest. Even better if you go for a 0% interest rate card you could pay absolutely no interest for the intro rate period, as long as you pay the minimum monthly repayment each month.

• Example: Let’s use the same scenario of Lynda needing to borrow $10,000 that she will pay back over 2 years. Say Lynda takes out a credit card that comes with an interest free offer for the first 14 months, her ongoing monthly repayments would be $440 and she would pay $383 in interest. While a 0% interest rate offer could save Lynda nearly $700 in interest compared to the travel loan option, she will need to keep in mind the credit card reverts to a high 21.99% after the introductory period comes to an end.

When you take out a personal loan for your overseas vacay, you’ll be able to choose between several different types:

Secured loan: Do you own an expensive house item or car you can use as security for the travel loan? Then the lender may allow you to use this as security and will reward you with a more competitive travel loan deal with a lower rate and fees that will save you big bucks over the life of the loan.

Unsecured loan: Alternatively, if you don’t have security, then you’ll be in the market for an unsecured loan, which means you don’t need to put up an asset as security. Instead the lender will only assess your eligibility for the loan based on your genuine savings and credit history.

Fixed interest rate: If the last thing you want to think about when cruising the Amalfi Coast is your interest rate changing, consider locking in your rate by taking out a fixed travel loan. Just be mindful that these loans are usually less flexible than variable rate loans and come with some traps - one being a break cost fee if you try to pay off the loan before the agreed term.

Variable interest rate: While a variable rate loan does mean your rate could change at any time, you will usually get some better features like free extra repayments, a redraw facility and the flexibility to choose your repayment cycle. Plus, generally variable rates are lower than fixed interest rates.

For a full rundown on personal loans for travel, read our holiday loans guide here.

If you decide that a travel credit card sounds like your borrowing match, you’ll have three main types of plastic that you can choose between:

Rewards credit card: Are you planning a holiday full of shopping? Do you love racking up juicy rewards points? Then a rewards credit card could be a good option. Many come with bonus rewards points when you spend money overseas. For example, in some instances you may find a card that offers 1.5 points per dollar spent, but when you spend at overseas merchants, this could climb up to say 3 points per dollar. Plus, rewards credit cards often come with complimentary features like travel insurance, concierge and purchase protection. Use our rewards revealer tool, to see which cards have the goods for your spend.

0% purchase rate credit card: Another option for travellers, which we used in the above example of traveller Lynda, is taking out a credit card with a honeymoon rate. This means as long as you pay the minimum monthly payment you’ll be able to pay for expenses overseas without being charged any interest during the intro term. But of course when this honeymoon period comes to an end, make sure you have the savings available to pay the balance in full to avoid getting in debt.

Travel credit card: As would be expected there are also credit cards available that are specifically designed for Aussie jetsetters. These travel cards usually come with a low (or even 0%) foreign exchange fee and may also come with free travel insurance.

Mozo tip: If you decide to take advantage of the free credit card travel insurance, make sure you check what the provider’s requirements are for activating the cover e.g a minimum spend on the card and or return flight.

Read more about bringing some plastic with you on your holiday with our overseas credit card survival guide.

Now that we’ve run you through the different types of travel loans and credit cards available, let’s have a closer look at the difference between the two:

Travel loan pros:

• Fixed interest rate means your ongoing repayments will remain consistent making it easier to budget while jetsetting the globe
• Can usually borrow more than with a credit card, especially if you’re putting up an asset as security

Travel loan cons:

• Charged interest from the day you take out the loan
• Less flexible as you have to take out a lump sum

Travel credit card pros:

• Flexibility to pay as you go
• Good for small borrowing amounts
• Rack up rewards points that you can put towards free flights, cash back and shopping
• Free perks like travel insurance and concierge

Travel credit card cons:

• Could be tempted to spend more than intended
• High cash advance rate if you make ATM withdrawals
• Some come with high foreign exchange fees

In the beginning of this guide we used the example of traveller Lynda wanting to borrow $10,000 paid back over 2 years and found that the 0% interest rate card was the cheaper option. However, answering the question of “Is a loan or credit card better for travelling” isn’t that simple because both options have their positive and negative aspects.

When choosing it should really come down to your borrowing needs. For instance if you need to borrow a large amount for your overseas adventure and want the consistency of a fixed interest rate, then a travel loan could be the best travel money match for you.

Whereas, if you want the flexibility to pay as you go without high overseas transaction and currency conversion fees or if you want to rack up juicy rewards points and take advantage of complimentary features like travel insurance, a travel credit card could be a handy product to pack with you.

Whatever you decide we recommend taking more than one travel money option with you to ensure you always have an overseas money back up. To compare travel loan deals head on over to our personal loan hub or alternatively if you want to see the varying travel card options available visit our travel money hub.

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