Should you take Personal Loan for Vacations?

    Many people around the world have a traditional approach when considering a personal loan to finance their holidays. However, there are some instances when taking a loan for holidays could be justified. For example, if you do not have enough liquid cash with you, financing your holiday with a personal loan will let you save more than your credit card. However, this option is advisable if you have a good financial standing and the reason you are taking a loan is because of an once-in-a-lifetime event, like your honeymoon.

    If you take a personal loan, you can repay it easily with fixed instalments. The instalments will make it a lot easier to handle your cash flow. Also, among all unsecured credit facilities available, personal loans attract the lowest rate of interest starting from 4.5% p.a. to 20% p.a. A credit card, in contrast is a lot more expensive with a higher interest rate close to 25% p.a. and other charges such as late fees.

    In Singapore, you have to borrow a minimum of S$1,000 to be eligible for a personal loan. In case you do not require this high an amount for your holiday, consider using other means of credit in its place.

    Risks associated with using personal loan to fund your holiday

    As it is with any type of loan, you must make space for monthly payments in your budget as you will have to pay late fees if you fail to pay the instalment on time and your credit score will be impacted. Also, your Total Debt Servicing Ratio (TDSR) will take a hit in case you are thinking of purchasing your first flat. Getting a personal loan can potentially reduce your odds of obtaining a mortgage because getting loans will increase your TDSR.

    Preferably, your unsettled debts must be less than 60% of your income. So if you do not want to delay the purchase of your first HDB flat till the time your debts are cleared, you might have to reconsider getting a personal loan to finance your holiday.

    Here are a few things that you must keep in mind to get the best loan for your holiday.

    1. Understand Your Loan Requirements
    2. It’s the first and most important step to get the best rates possible on your loan. Figure out the amount you need to borrow and the time you will need to pay it back. Knowing your loan requirements will help you compare loans from different lenders. However, keep in mind that the longer the tenure of your loan, more the interest you will be paying over the time.

    3. Know Your Credit Score
    4. Before you start looking around for loans, it’s good to take a look at your credit score as well. Credit score has a direct impact on the interest you will be paying on your loan. Higher the score, better the chances of you getting a loan at attractive rates. In case your score isn’t as good, figure out what all you can do to improve it.

    5. Shop Around for the Best Possible Rates
    6. Different lenders may charge different rates for the same loan amount and tenure. Shop around for the best rates – it can make a huge difference to your pocket. Also, when you compare loans, look for their Effective Interest Rate (EIR), which reflects the real cost of a loan.

      Assume that there are two loans available: Loan 1 and Loan 2. Both the loans are of same amount, have the same interest payable, and have the same tenure. Loan 1 requires you to make frequent payments of small amounts, while Loan 2 requires to make less frequent payments of larger amounts. So, even as the two loans have same interest payable, the fact that Loan 1 offers you less liquidity (as you make frequent payments) makes it costlier than the Loan 2. Therefore, the EIR of Loan 1 would be higher than the EIR of Loan 2.

    7. Don’t Go Overboard With the Loan
    8. While borrowing has become easier than ever before, the rules of sensible borrowing remain the same. It still makes no sense to borrow when you don’t need it. So, when you are borrowing for your holidays, keep your loan to a minimum. Figure out how much you actually need to borrow and if you can repay the amount with your income levels.

    9. Don’t Overlook Promotional Offers
    10. Make sure to check the promotional offers on personal loans . While some lenders offer special rates on borrowing for a specific tenure, some offer processing fee waiver if you apply within a certain time period. Check promotional offers from all the lenders before you make a decision. If you are borrowing a large amount, it can save you hundreds of dollars.

    11. Plan and Start Early
    12. Even as most banks promise to approve the loan within minutes, it’s best to start early to avoid the last minute hassle. Actually disbursal of funds may take about a week or two. Also, when you start early, you will have enough time to shop around and compare the loans.

    When should you apply for a personal loan for a holiday?

    Ideally, you should have a minimum buffer of up to three weeks for the loan application to be processed. Once you have made a decision to go on a holiday, you must apply for the loan immediately. Since you will have to pay for hotel rooms and flights upon booking, it would be better to have enough funds available. Under such circumstances, you will be able to take advantage of flash sales and promotions and save more money.

    The amount you borrow should not depend on the sum the bank is ready to lend, but it should depend on how much you require and your ability to repay over time. If you do not adhere to this rule, you may face a tough time repaying your loan.

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