Personal loans: Why taking a loan for travel may not be a good idea? | Mint

Are you planning to go on a vacation by taking out a personal loan? This is obviously not a good idea. A personal loan is an unsecured loan which levies a high rate of interest from borrowers.

To avoid falling into a debt trap, one should refrain from taking out loans for such purposes as travel. These are some of the key disadvantages of personal loan that you should be aware of before you decide to take one.

Say no to personal loan: 5 Key reasons 

1. High interest rate: Being an unsecured loan, it has a high rate of interest. This adds to your liability significantly. Therefore, it should be avoided.

2. Discretionary spending: Being a discretionary expense, one should avoid spending money raised via loan on vacation. Instead, one should save money before deciding to travel.

3. Financial discipline: The ideal way to go on a sojourn is to save money from your monthly income on a regular basis and accumulate money by the time you are scheduled to go.

When you start taking out loans for something as avoidable as travel, you inculcate a bad habit in the process. This leads to accumulation of debt in the long run which you may have taken for such expenses.

4. Emergency in future: When you take too much of a personal loan now for avoidable expenses, then you compromise your ability to take out a loan in future when you would genuinely need it.

5. Credit score: The more credit you take in proportion to your income, the poorer your credit score becomes. So, to keep your credit score at an optimum level, you need to make sure that you don’t take a personal loan when it is avoidable.

However, there could be a one-off case when it makes sense to take out a loan for travel. Let us suppose you have a pre-planned trip to an exotic destination with your school friends and you are meeting them after a decade.

You are likely to receive the funds two months later as an annual bonus but somehow have run out of money at the moment. Now, you can’t postpone your trip because it’s not a family picnic and you do not want to miss out on this either.

What else can you do – either borrow from a friend or take out a small personal loan for a short period to avoid missing out on this long awaited get together.

(Raising a loan comes with its own risks. So, due caution is advised.)