How to use a personal holiday loan for your next trip

For some of us, travel is an essential part of life. Holidays allow work-life balance, expose us to new cultures and cuisines and often allow us to visit family and loved ones near and far.

Whether you’re planning your honeymoon or a family holiday, a personal loan is one option that might help you get you where you want to go sooner. But there are a few things to consider before borrowing the cash and packing your bags.

A holiday or travel loan is an unsecured personal loan that is used to pay for all or a portion of your holiday, allowing you to spread out the cost of the trip over your loan term, plus interest. This could help you budget for the loan, make regular payments and take that break sooner.

The type of travel you’re considering is unlikely to matter to the lender — what matters most to them is your ability to repay the loan. Depending on your financial circumstances and the loan terms, the interest rate on a personal loan can sometimes be less than a credit card, which may make it more affordable over time.

A holiday loan is the same as an unsecured personal loan and is used to help finance a holiday. Each lender will have different policies and criteria for holiday loans, but they typically function in the same way as most unsecured personal loans. In many cases, you may just be taking out a standard unsecured personal loan for the purpose of financing your holiday.

You can usually choose the length of the loan term and that will help determine how much your repayments are, along with the interest payable and any other fees. You can also choose how often you want to make repayments to help you budget. In many cases you can choose between weekly, fortnightly or monthly.

There are usually three types of holiday loans; a term loan, a line of credit loan or a tailored travel loan. Here’s the difference:

These are usually the most common and essentially work like a standard personal loan. You borrow a certain amount of money, receive it in a lump sum and then have a specified time (or term) to make your repayments. You may be able to choose between a fixed or a variable interest rate. Fixed-rate loans maintain the same interest rate over the life of the loan, while variable rate loans are subject to fluctuation.

This allows you to access a specific amount of credit when you need it and you’ll only pay interest once you withdraw the money, similar to using a credit card or redraw facility. Like a credit card, the term is ongoing and repayments are usually flexible.

With a tailored travel loan, you may be able to have the loan approved before booking so you don’t miss out on deals that become available. Many lenders will allow you to choose the loan term, helping you pay for your holiday in instalments and budget for each payment.

Different lenders will have their own application process and set of eligibility criteria, however, most will require you to be an Australian citizen or permanent resident, aged 18 years or older with acceptable identification such as your passport or driver’s licence, plus proof of income such as bank statements or pay slips.

Again, criteria will vary depending on the loan you’re considering, so read the terms and conditions of any loan before applying. Like applying for any other unsecured personal loan, you can usually apply online, over the phone or in a branch, depending on the lender.

Before you begin the application process, it’s a good idea to check that you have a healthy credit score and minimal existing debt. If you’re considering a holiday loan, it’s worth checking out a variety of lenders to compare their individual terms and conditions as well as payment policies to find what suits your circumstances.

Before making any decisions about applying for a loan, it’s important to consider the following things:

A fixed rate allows you to lock in a specific rate for the life of the loan, meaning your repayment amount and interest rate stays the same. If you choose a variable rate, the interest rate you’re charged may increase or decrease over the life of the loan, making it harder to budget for.

A variable rate loan often has fewer restrictions. For example, you might be able to repay the loan early or make extra payments when you’re able to without any penalty fees. Fixed rate loans will generally have shorter payment terms, whereas variable-rate loans can sometimes offer longer repayment periods. This will vary depending on the individual lender, so make sure you check the terms before applying.

When calculating your repayment cost, make sure you also take into account the interest charges and ongoing fees that might be associated with the loan such as an application or establishment fee, monthly admin or account keeping fees. Most lenders have different fee structures so it helps to compare as fees contribute to the overall cost of the loan.

Some lenders will charge a fee if you make extra repayments or pay your loan off early. So, if you think you may be in a position to do that, it may be worth finding a lender that doesn’t charge you. Lenders may also charge a late payment fee if you miss a payment so make sure you can manage your repayments before you apply.

A longer loan term may reduce the size of the repayments you need to make, but generally means you may pay more interest over the life of the loan. Choosing to repay your loan weekly or fortnightly may result in paying slightly less in interest over the life of the loan.

Consider the additional costs of borrowing the funds versus saving for a holiday. When you borrow money for a holiday, you will need to pay back the loan plus any interest and fees, and you may still be paying for the holiday long after you return home. Make sure you’re comfortable with the total cost of the loan before you pack your bags.

Consider the various features being offered by lenders and decide if you want to take advantage of them. Some may offer discounted travel insurance with their holiday loans as a package deal. It may be worth comparing the costs and coverage with other insurance providers before deciding.

Remember, as with all loans, it’s important to ensure you can confidently afford your holiday loan repayment, and consider the additional costs, before you apply.