Six factors to keep in mind before availing travel loans

Travel loans are a variant of personal loans, offered to consumers for financing their travel-related expenses. However, very few lenders offer travel loans as a separate variant of personal loans. As the features of travel loans are similar to personal loans, consumers can also avail regular personal loans to pay for their holiday expenses. Here are some of the factors that a prospective applicant should consider before availing a travel loan or a personal loan to cover his travel-related expenses.

Credit score

Just like personal loans, most lenders offering travel loans consider the credit scores for evaluating the eligibility of their loan applicants. Many lenders also consider credit scores while setting the interest rates of their travel or personal loan applicants. Lenders are more likely to approve personal loan or travel loan applications of individuals having credit scores of 750 or above. Many lenders also offer personal loans at lower interest rates to applicants having higher credit scores. Thus, prospective personal loan borrowers should improve their credit scores by repaying their credit card bills and EMIs within the due date. Applicants should also avoid making multiple loan or credit card applications within a short period. Doing so will not only help improve your credit score, but it will also increase your eligibility for availing personal loans or other credit facilities at lower interest rates.

Note that any errors present in your credit report can lower your credit scores. Therefore, you should fetch your credit report at regular intervals, identify any clerical errors or incorrect information present in these reports and report them both to the lender and to the concerned credit bureau for rectification. A rectified credit report would automatically improve your credit score.

Interest rates

Lenders usually offer personal loans at interest rates starting from 10.49 per cent p.a. The interest rates of travel loans are also usually the same as personal loans. The final interest rates offered on personal loans or travel loans may vary from lender to lender depending on the borrower’s credit scores, monthly income, occupation profile, employer profile, etc. Lenders usually offer their lowest personal loan interest rates to loan applicants having the best credit profiles. Therefore, always compare the personal loan or travel loan interest rates offered by as many lenders as possible before making the final application.

As many banks/NBFCs offer personal loans or travel loans at lower rates to their existing customers, always check with your existing banks/NBFCs with whom you already have deposits, loan accounts or credit cards regarding their personal loan offers.

EMI affordability

Lenders usually prefer sanctioning travel loans to individuals whose total EMIs, including the EMI of their proposed loan, remain within 50-60 per cent of their net monthly income. Therefore, applicants availing travel loans should find the optimum EMIs and tenures for their personal loan, depending on their repayment capacity. Applicants whose total EMIs exceed 50-60 per cent of their net monthly income should opt for longer repayment tenures and/or lower personal loan amounts to reduce their monthly EMIs and improve their EMI repayment capacity.

Repayment tenure

Lenders usually offer personal loans for repayment tenures of up to five years. However, some public sector banks may provide longer tenures of up to seven years. As EMI is inversely proportional to the loan repayment tenure, opting for shorter loan repayment tenure leads to higher EMIs and vice versa. Personal loan applicants should note that longer tenures lead to higher interest costs. Thus, consider using Personal Loan EMI calculators to calculate the interest costs on your loan and find their optimum tenure.

Prepayment charges

RBI has mandated that lenders cannot charge part-prepayment/foreclosure fees from borrowers availing floating-rate personal loans. However, lenders are allowed to levy prepayment/foreclosure charges on personal loans availed at fixed interest rates. While most lenders levy prepayment charges of up to five per cent on their outstanding principal loan amount, some lenders also restrict their personal loan customers from making prepayments before they have repaid a predetermined number of EMIs.

Therefore, loan applicants should compare the prepayment charges of various lenders before they apply for a personal loan or travel loan. Doing so will help them choose a lender that charges NIL or low prepayment fees with the least restrictions, especially if they are planning to prepay their loan in the future.

Processing fees

The processing charges on personal loans can go up to four per cent of the loan amount. Some lenders may limit their processing fees, regardless of the personal loan amount, while some others may waive it off during festive seasons. Although the processing fee is a one-time charge levied on personal loans, it can increase the total cost of availing the loan. Thus, prospective borrowers should compare the processing fees offered by various personal loan lenders before availing personal loans from a specific lender.

— Shagun Sharma is an independent business journalist.

• KT Network