Travel loans: Options for travellers as COVID restrictions ease

‘Targeted travel’ could become the dominant trend among Aussies tentatively dipping their toe back into overseas travel in 2022, according to an industry expert. What else can we expect for travel this year and what are your options if you’re contemplating covering your travel costs with a loan?

What are Australians’ travel plans for 2022?

Having been mostly grounded for the past couple of years, many Australians are planning to get back travelling. A recent survey by online bank 86 400 found that 44% of respondents were saving up for domestic or international travel or both. Travel was also one of the top reasons Australians are saving, according to Canstar’s Consumer pulse survey.

But while the urge to travel may be returning for some, CEO of the Australian Federation of Travel Agents (AFTA), Dean Long, said Aussies will likely be very selective about where they choose to go.

“You’re going to see very targeted travel for very targeted experiences,” he said. “I don’t think you’re going to see big demand for multi-country trips, but those countries that can offer a diversity of experiences and a good healthcare system will be popular for people who are travelling.”

Mr Long said countries like the UK, the US, Canada, Fiji, New Zealand and Japan will be high on travel wish lists, although this will also depend on the extent to which border restrictions allow access to and from these destinations. He said it could take longer for demand for some of the other traditionally popular destinations, such as Bali, to return.

With pandemic clouds still overhead, travellers who do book a trip will be looking for as much certainty as possible, according to Mr Long.

“Those destinations that have implemented very good COVID-safe procedures will be where Australians want to travel. People will also be looking for packages that remove as much of the confusion as possible and also give people confidence that they will be able to do the experiences that they want.”

Looking at domestic travel, Mr Long said he expected north Queensland, the south and north coasts of New South Wales and destinations in southern Victoria to be popular as confidence grows that borders in those states will remain open.

For Aussies planning a trip in 2022 or beyond, Mr Long recommended booking through an accredited provider for a higher degree of protection, making sure you have at least six months’ validity on your passport and getting travel insurance, plus making sure you understand what the policy covers by reading the T&Cs. He also advised travellers to be prepared for a different kind of experience, compared to pre-COVID-19 travel.

“Be very clear about what your expectations are and what your risk level is,” he said. “It [travel] will be a bit more nerve wracking than what it might have been previously. It doesn’t mean it will be worse; it will just be different to what you experienced before.”

If you are planning a trip, and are considering a loan to help fund it, Canstar explains how travel loans work and how much they cost.

What are travel loans?

A travel loan is a type of personal loan that’s used to cover the cost of a holiday or other type of travel. They generally work in a similar way to other kinds of personal loans, but are sometimes marketed by lenders to borrowers who are looking to fund travel specifically. Travel loans are typically unsecured, meaning the item being purchased is not used to secure the loan (unlike a car loan, which is a type of secured loan) and can come with either a fixed or variable interest rate.

The amount you can borrow using a travel loan differs depending on the lender, but the amounts typically range between a minimum of $2,000 up to a maximum of $50,000, based on the products on Canstar’s database.

How much does a travel loan cost?

If you take out a travel loan to pay for a holiday, you will need to pay back the loan amount as well as interest charged by the lender and often upfront and regular fees, too. How much a travel loan ends up costing will vary from lender to lender based on their interest rates and what fees they charge. Generally, the higher the loan amount and the longer the loan term, the more the loan will cost you overall.

As a hypothetical example, Canstar has calculated the cost of a $5,000 and $10,000 loan over three years based on the average interest rates and fees charged on personal loans on our database that can be used to fund travel at the time of writing.

Average costs for a $5,000 and $10,000 travel loan

← Scroll sideways to view full table → 

Source: www.canstar.com.au – 25/01/2022. Based on unsecured personal loans available for the purchase of a holiday on Canstar’s database, for the respective loan amounts and loan term of three years. Average interest rate calculations use the midpoint of the rate range, where applicable. Total cost includes total interest paid plus the applicable fee/s, which are assumed to be paid separately and not added to the loan balance. *Average calculations for fees based on all applicable products, including those that don’t charge a fee.

These calculations assume that the borrower makes all of their repayments (including any fees) on time. Some lenders can charge extra fees for missed payments, or other optional additions, such as if the borrower requests extra printed statements. Check with the lender and read the relevant loan documents for a full list of fees and charges before applying for the loan.

How can your  credit score impact a travel loan?

Another factor that can impact the cost of a travel loan is the borrower’s credit score. Some lenders tailor their interest rate for borrowers based on their credit score. Generally, borrowers with a higher credit score have access to cheaper rates, as these borrowers are usually seen to represent less of a risk to the lender.

The hypothetical examples below show the difference in cost for borrowers with an ‘average’ credit score and an ‘excellent’ credit score, based on a $10,000 loan repaid over three years.

Travel loan costs based on credit score

← Scroll sideways to view full table → 

Source: www.canstar.com.au – 25/01/2022. Based on unsecured personal loans available for the purchase of a holiday on Canstar’s database, for a loan amount of $10,000 and loan term of three years. Average interest rate calculations use the midpoint of the rate range, where applicable. Total cost includes total interest paid plus the applicable fee/s, which are assumed to be paid separately and not added to the loan balance. *Average calculations for fees based on all applicable products, including those that don’t charge a fee. **Rates and fees are based on a sample of personal loans in Canstar’s database that categorize credit using ‘average’ and ‘excellent’. The definition of ‘average’ and ‘excellent’ credit varies by provider.

While the fees on the loans are similar for the two credit score levels, the big difference in interest rates on offer accounts for the bulk of the more than $1,600 difference in overall cost.

→ Related: How to improve your credit score

What expenses can travel loans be used to cover?

Travel loans can generally be used to cover a range of travel related expenses, such as airfares, accommodation, tours, travel insurance and travel accessories such as suitcases. Unlike a secured loan where the loan is secured by the item being purchased using the loan funds, travel loans are usually unsecured, meaning the borrower has greater freedom over what to spend the money on. Keep in mind unsecured loans often come with a higher interest rate than secured loans, as the lender has less capacity to recoup costs if the borrower defaults on their loan.

Who can get a travel loan?

Lenders set their own eligibility criteria for their travel loans and it can vary from one provider to another. Generally speaking, to be eligible for a travel loan, you must be:

• an Australian citizen or permanent resident
• over 18 years of age
• able to demonstrate you have sufficient regular income to be able to repay the loan.

How to compare travel loans

With dozens of lenders offering travel loans in Australia, it can be worth comparing your options to ensure you get a good deal. Rates and fees can vary significantly between providers, but so too can the features on offer from the lender. Here are some of the factors to weigh up when you’re comparing.

• Rates and fees are the primary factors contributing to the cost of a travel loan and it’s worth paying attention to both. For example, a loan with an enticing interest rate could have hefty fees which bring up the overall cost. The loan’s comparison rate is designed to help borrowers get an idea of the total cost of the loan per year and must be advertised alongside the interest rate by the lender.

• The type of interest rate can also impact how suitable a loan may be for you. Most personal loans come with a fixed rate, but variable rates can also be available. A fixed rate means your repayments stay the same for the duration of the loan term, while with a variable loan, the rate and therefore your regular repayment amount, can go up or down.

• Features can also be important, such as having the ability to make extra repayments without penalty and the flexibility to make payments weekly, fortnightly or monthly. If you make extra repayments, some loans enable borrowers to withdraw those extra funds again using a redraw facility.

Canstar’s Personal Loan Star Ratings and Awards may be helpful if you are comparing products, as the methodology takes into account both the cost and features of the hundreds of personal loans on our database.

Pros and cons of travel loans

Whether or not a travel loan is suitable will come down to your financial situation and your travel plans, but in making a decision, here are some factors you could consider.

Pros of travel loans

• The application process is generally quite simple and funds can often be paid to the borrower quickly.
• Can be a cheaper alternative to other ways of paying for a holiday, such as using a credit card and then repaying the balance gradually.
• There’s a lot of choice for borrowers, both among banks and other non-traditional lenders who offer travel loans.
• Tailored interest rates on offer from some lenders mean borrowers with a high credit score may be eligible for a cheaper rate.

Cons of travel loans

• Adds to the cost of your travel as you will also need to pay interest and loan fees too potentially. You will also likely be repaying your travel costs long after your trip has ended.
• Taking on debt in the form of a travel loan can have an impact on your wider finances. For example, it may affect your ability to get additional credit down the track if you need it, as lenders consider any existing loans you have when reviewing your application. It may impact your credit score negatively if you miss any repayments, but on the flipside, your credit score could improve if you consistently make on-time repayments.

What are some other finance options for your travel plans?

A travel loan is just one of the options for funding a trip or financing a holiday. Some of the other ones include using your savings, a credit card, buy now pay later (BNPL) or a travel credit from a cancelled trip. Here’s an overview of pros and cons of each.

Travel credits

With many travellers experiencing cancellations over the past couple of years, using a credit you may have received from a provider for a previous booking could be an option. According to AFTA, 52% of bookings are being funded at least in part by existing credits from COVID-impacted travel. This could be appealing as it would mean minimising any extra cost. Bear in mind any restrictions there may be on what you can use the travel credit for.

Savings

Many people have built up extra savings during the pandemic. If you have money in savings or as an emergency fund, paying for your trip using these funds will be cheaper than taking out a loan, and likely cheaper than using a credit card, as you won’t need to factor in fees or interest costs. It also means not taking on any debt, which could also be good for your overall finances. A potential drawback is that taking a bite out of your savings could leave you short if other urgent expenses crop up.

Credit card

You can also typically put travel expenses on your credit card if you have one, and there can be benefits and drawbacks to choosing this option. For example, some credit cards offer a level of travel insurance if the trip is booked using that card. It’s important to carefully check what is covered and what exclusion and limits apply to any insurance you get.

Some credit cards also offer additional security compared to a debit card, which may offer greater peace of mind if you are using the card overseas. There are also frequent flyer credit cards that may be of interest to keen travellers.

Bear in mind though that if you do put a trip on your credit card and you don’t pay off the balance of your next statement in full, you will be charged interest. Because of the high interest rates on many credit cards compared to some other kinds of credit, this could add considerable cost to your holiday if it takes you time to pay it off.

Buy now pay later

Depending on the cost of your trip and who you book it through, you might be able to fund all or part of it via a buy now pay later (BNPL) service. While BNPL providers typically do not charge interest, they can still be costly to use as fees can rack up quickly if you miss any of the repayments on your account. And while it’s not technically considered to be a form of credit, Moneysmart warns that using BNPL services can make it easier to overspend and the accounts can be hard to manage.

Can I cancel my travel loan if my trip is cancelled?

Whether you can cancel a travel loan if your trip is cancelled would likely depend on how the trip has been booked. Chances are by the time your planned holiday is cancelled, you may have already received the loan funds and used them to make a payment to the travel provider. In that instance, you may not be able to cancel the loan, but instead you may have the option of simply paying it back early – for example, using any funds you have refunded to you by the travel provider.

Similarly, if the loan funds have been received but you haven’t used them yet, you could simply repay the funds to the lender if your planned trip is cancelled. Bear in mind some lenders charge early repayment fees if the loan is repaid before the end of the contracted term.

If you have not yet received the loan funds, it may be possible to cancel the loan even if it has been approved, but there may also be an admin fee charged by the lender in this situation.

If you are applying for a travel loan and are concerned about what might happen if your plans change, your best bet may be to speak to the lender beforehand to discuss your options and understand what their policies are regarding cancellations.

Having travel insurance may offer you some protection and financial support in covering the expense of  cancellations on your holiday, depending on your policy and eligibility requirements.

Cover image source: My Agency/Shutterstock.com