Funding: Holiday In Your Pocket

Your first foreign holiday ought to be an enjoyable, and care-free, time — of fun and adventure. But, though it’s easy to keep anticipation and excitement high, you are most probably keeping a close watch on your wallet, too. Foreign holidays don’t come often and, yes, aren’t exactly inexpensive, either.

A typical US trip — a 6-day, 7-night package — could start at a price tag of Rs 1,13,785 an adult, which probably includes the usual features such as tickets, visa, boarding, meals and sightseeing. If you want more adventure (and include some exotic destinations or an Alaskan cruise or a trip through the Grand Canyon), the tab could rocket up substantially. And, that does not include some of the expenses you would naturally incur on souvenirs and gifts for family and friends back home.

As these holidays go, you don’t want to miss out on the fun. So, you have to trawl through the tedium of financing your tour pretty early, and keep a buffer for spur-of-the-moment spending. A typical family of four could require about Rs 4 lakh at the least for a decent top-end holiday to a foreign destination.

And, unlike many other financing decisions, this one is probably the most difficult to crack. Travelling is a discretionary expense, or one that you can mull over and probably dismiss as unimportant. It’s easier for people to fund a wedding or a car through bank finance, but a holiday? Hence, typical questions arise: should one borrow for leisure travel? How to make funds available for this tour? What are the financing options?

Thankfully, foreign holidays are not generally sudden decisions. Hence, you can plan your finances much earlier. And, given the way financing has mushroomed and the large amounts of credit available to people, financing for travel has gotten quite trouble-free.

In normal circumstances, families would dig into reserves and savings to fund holidays. Says Abraham Alapatt, president & group head, Marketing, Service Quality, Financial Services & Innovation, Thomas Cook, India: “In some sense, tour-loan financing didn’t find too much traction as people normally don’t borrow for a holiday. What has changed, however, is that as credit cards are offering easier loan options, that segment is seeing some movement.”

Over the last couple of years, more people are increasingly opting for EMI on credit cards to avail of travel or other, related, loans. For most people, credit cards provide the convenience of no paperwork, and as long as borrowers are within the credit limits proffered by banks, an EMI option is usually a call away.

Typically, youngsters are not shying away from footing their travel bills with a credit card, particularly those looking for their first holiday to a South Asian destination or for a short education tour, where the cost of travel and stay is manageable. If these expenditures are not exorbitant, a credit card becomes an easy mode of availing of finances.

Says Naveen Kukreja, co-founder and CEO, Paisabazaar.com: “If the customer is looking for a quick processing and the loan amounts are usually smaller with a shorter duration of loan, credit cards are usually convenient. Of course, the rate of interest on a credit card is normally 2-3 per cent higher than a personal loan.”

Credit card companies offer installment options on spends, which is often converted to an EMI by calling your bank. The bank or the credit card issuer converts the bill for an EMI for a specified length of time. Hence, you can convert travel cost into an EMI. But the cost is still quite significant. The typical interest rate could hover around 24 per cent per annum, but this differs between banks.

Personal Loan A Cheaper Option
On the other hand, if you want to travel and are quite okay with a little bit of processing time, financing your travel through a personal loan is a bit of a better and cheaper option. Travel loans come under the umbrella of personal loans. Kukreja reckons that about 15 per cent of applications made in personal loans are for travel related purposes, and the typical amount of disbursements for travel is around Rs 2-4 lakh.

A few banks do have a tie-up with travel companies for personal loans. Says Deepak Sharma, executive vice president & head, Digital Initiatives, Kotak Mahindra Bank: “As part of one such initiative, we have tied up with Thomas Cook and Kuoni Travels, where customers can select domestic or international packages offered by these agencies. Customer can make payment for these packages by availing a personal loan with an easy installment option.”

Of course, there is some paperwork involved, and banks are usually asking for your credit and repayment history along with your income documents.

Processing time is usually longer, and could range from 1-3 weeks. At the end of it, you may have to contend with rejection of your loan, if the banks find your credit history not quite encouraging. However, if your job description is good, and income is high enough to comfortably pay the EMI, your personal loan for travel should be a breeze. Says Kukreja: “One should look for the processing fee, which ranges from about 0.5-2 per cent. You should also see that the prepayment penalty is quite low, just in case you want to pay off the loan earlier.”

Most travel companies also offer discounts on hotels, as well as packages (though this is common for all travellers, regardless of whether they are taking a loan or not). Typical travellers on the EMI route are not likely to get discounts over and above the ones normally being offered. Says Neelu Singh, CEO and director, Ezeego1: “The discounts that we offer across all products at the time applies. There will be no additional discounts for customers availing of the EMI facility. The bank reserves the right to offer a discount on rate of interest based on their independent assessment.”

Saving For Your Holidays
On the other hand, travellers looking not to take on the hassles of a loan can also save for their holidays through savings packages offered by some tour operators. If you want, say, a Swiss holiday in a year’s time, you could opt for one of the Swiss packages and make monthly savings with a banking institution to fund the expense.

Wannabe travellers will have to open a recurring deposit account with a bank, and make regular deposits into these accounts. The cost of the tour is divided typically into 12 installments, while the 13th is funded through the interest on the recurring deposit. For example, Thomas Cook has partnered with Kotak Mahindra Bank while Cox and Kings has a tie-up with Ratnakar Bank. Says Ravi Menon, head, Foreign Exchange & Insurance, Cox & Kings: “This programme has been designed keeping in mind that the traveller gets an opportunity to plan a holiday a year in advance.”

A typical European 9-night, 10-day holiday, covering France, Switzerland, Austria and Italy can be funded in a year’s time by saving the requisite EMI. For example, if a tour costs Rs 1.7 lakh per head, the monthly installment a customer would have to make to a bank is Rs 13,076 for 12 months. The 13th installment, comprising interest and any other additional amount, will be done by the travel company. Says Allapat: “We are guaranteeing an inflation-proof holiday, and most people feel proud to save. Hence, this allows them to take a better holiday.”

The typical interest rate on these travel deposits is about 7-7.25 per cent, and they largely work as a recurring deposit. This is good for people who want to plan a long foreign holiday in advance. Says Sharma: “If the holiday is being planned in advance, a holiday RD can be opened, where the customer can save for 12 months, and earn interest on the same.”

On your travel, however, you don’t need to carry wads of cash. Another product that could come in handy and is offered by most banks is a multi-currency prepaid card. Some of these cards offer the option of paying in dollars, or any other currency. But, on your travel, you do not want to carry cash or calculate exchange rates when you are out shopping.

One can just top-up the travel and prepaid cards. Says Sharma: “Travel cards allow customers to load multiple currencies, and can be topped up online. Travel cards make for an excellent option to carry foreign currency, as it eliminates the risk of theft.”

All in all, if you are looking for a quick getaway, a normal EMI on credit cards could be your option. But if it’s the longer destination, and you are not averse to funding it through loans, one option could be personal loans. Says Kukreja of Paisabazaar.com. “If the travel is discretionary, it should always come out of your savings. If the travel is an emergency and you cannot finance it yourself, of course, a loan is OK. If you have a good credit history, personal loans would be the cheapest form.

But if you have the time, there’s nothing like pouring the good old recurring deposit into the adventure.

The Costlier Card EMI

* Using a credit card for EMIs could be a costly option as banks bundle in interest and processing fees in your EMI break

* The typical interest rate on your credit card transaction varies between 34.4 per cent and 42 per cent per annum if you roll over the payments

* However, opting for an EMI will help you reduce the costs of travel, but not by much as interest rates still hover around the 24 per cent mark

* Watch out for processing fees and prepayment penalties which are normally in the range of 0.5-2 per cent; these raise the cost of loans

* Defaulting on your card EMI will result in the same showing up in your normal transactions where interest costs are much higher

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