The money question: Which loan to choose for a holiday

A foreign holiday has been on the cards for the Kumars for some time. The Kumars are a double-income-single-kid family, and have modest savings and investments. They don’t want to redeem any investment for the holiday and think a loan is a better idea. They have three options: A credit card, personal loan, or an EMI-based repayment option from a travel agent. Which one should they pick?

The Kumars should avoid using a credit card for a large expense that they are likely to cover only over a period. If it is only for convenience and their regular income is adequate to repay the credit card balance without rolling the balance over, the credit card could be used. If the expense on the trip is likely to be higher than regular savings that they manage every month, using a credit card would be extremely expensive.

Taking a personal loan from a bank, which can be repaid through EMIs, is a better option as the interest on this type of loan is lower than that on a credit card. Banks do not require elaborate documentation or assets for a personal loan, nor do they insist on knowing the end use of funds. The loan from the tour operator is likely to have a higher interest than the bank loan because the operator would only re-lend funds from banks and finance companies. The Kumars should compare both before making a choice.

Several times, loans from tour operators and finance companies, though expensive, turn out to be convenient and fast. If they can plan and get a personal loan pre-sanctioned, they can enjoy a better rate and convenience.

As a rule, unsecured loans that do not create an asset but result in spending, are more expensive than loans for acquiring an asset. The Kumars need not liquidate their investments, but can explore the possibility of taking a loan against their assets at a finer rate.

They can take a loan against their deposits or securities with their bank to fund their holiday. The investment would be intact and the loan could be repaid in instalments. The Kumars should speak to their bank to explore this option before choosing an unsecured loan.