Holiday Loans and Your Credit Score: What You Need to Know

With rising travel costs, planning your dream vacation may not always be a walk in the park. If you don’t have adequate savings or want to steer clear of your emergency funds to pay for a holiday, borrowing holiday loans is an excellent alternative. Here’s everything you need to know about such loans.

As the name suggests, holiday loans are a kind of unsecured personal loan that can be used for financing a holiday. You can apply for such a loan regardless of the type of vacation you intend to take. In other words, whether you are looking to relax at a luxurious resort or plan to embark on a jungle safari, holiday loans can come to your rescue when you don’t have adequate liquidity to pay for the vacation.

There are three types of travel loans in Australia

Term loans

This is the most popular type of loan and works just like a personal loan. You borrow a certain amount of money and repay it along with interest within a specified period of time. You are free to use the proceeds to fund your vacation.

A credit line

Holiday loans can also be provided as a line of credit. This gives you access to money whenever you need it. You pay interest only on the amount you withdraw and use. Once you repay, your limit is reset. This is a revolving facility that makes repayments more flexible.

Customised travel loans

There are lenders in the market who offer customised travel loans. These are also personal loans but are named travel loans where the proceeds are to be specifically used for paying for your travel. Unlike term loans, repayment of such loans starts as soon as you borrow the loan.

Here are some key features of holiday loans:

• These loans carry a fixed interest rate. You can calculate your repayment instalment without worrying about any interest fluctuations in the market. In some cases, the interest rate of holiday loans is lower than the regular APR of a credit card. It is important to note that interest-free travel loans are only available to certain classes of refugees permitted to seek residence in Australia by the Australian government under its humanitarian initiatives.

• You don’t have to furnish collateral or present a guarantor to secure your loan.

• You get instant access to the loan amount once your application is approved.

• There are some lenders in the market who also provide holiday loans for bad credit. In case your credit history is in bad shape, you can still fulfil your vacation dreams by availing travel loans for bad credit. These loans work in the same manner as personal loans for bad credit.

Holiday finance is essentially like an unsecured personal loan. You can use the proceeds of vacation loans to fund virtually everything -- from paying for flight tickets and hotel accommodations to purchasing souvenirs and food.

The repayment term of the majority of small holiday loans tends to be much lower compared to other personal loans. Usually, you have several years to repay other personal loans, but you only get a few months to pay off a personal loan for travel. Some lenders also provide such loans only during the holiday season, making it challenging to plan a vacation during off or shoulder seasons.

When comparing holiday loans online, here’s what you need to keep in mind:

Interest rates

Choose a loan with a fixed rate. It helps you to lock in the repayment instalment and plan your finances better. Fixed-rate loans also have a shorter tenure compared to variable ones.

Any additional fees for repayment

Take into account any default interest rate and penalty you may have to pay for missed or delayed repayment. Also, check if the lender will charge a pre-payment penalty for paying your loan ahead of the agreed date.

Loan terms

A longer term means smaller loan instalments, but it also means paying more interest over the life of the loan. Ideally, opt for a term that enables you to pay off the debt comfortably.

Credit score requirements

Apart from lenders offering no credit check loans, most lenders only approve borrowers who fulfil minimum credit score requirements. The minimum credit score for a personal loan varies depending on the lender you are approaching. Make sure to check the eligibility criteria before you apply.

If you do not have a good credit score, check whether you can borrow holiday loans for bad credit. These loans work in the same manner as payday loans for bad credit. Another option is to look for holiday loans with no credit check. However, these loans may carry a higher interest to minimise the lender’s risk.

How much travel loan you can borrow depends on various factors, such as your credit score and the lender you approach. On average, most borrowers are eligible to borrow between $2000 to $100,000.

Also, keep in mind that holiday loan amounts tend to be lower than personal loans. Moreover, a vast majority of lenders also levy additional fees when approving your holiday loan application. For instance, a loan origination fee is a common fee charged by most lenders and is expressed as a percent of the total amount you can borrow. It is added to your loan balance. Therefore, if you borrow $ 3000 and pay an origination fee of 3 percent, you will need to repay $ 3030 even though you will only have $ 3000 at your disposal.

Having said that, don’t make multiple holiday loan applications within a short span of time. Some credit reporting bodies may record the rejections in your report, and too many rejected applications can signal to a potential lender that you are not good at managing your finances. And how long does a declined loan stay on your credit file? It can be anywhere between two to five years, depending on the credit rating body.

Travel loans are unsecured personal loans and affect your credit score like any regular borrowing. If you stay on track with your repayments, your credit score won’t get impacted. In fact, timely repayments can help you to improve an existing bad score as lenders and credit rating bodies follow comprehensive credit reporting in Australia that takes into account positive events to calculate the final score.

However, if you miss payments or repay your personal loan for holiday past the due date, the information gets reported to credit rating bodies. A negative repayment history impacts your score adversely.

Despite their easy availability, exercise caution when applying for vacation loans. Try to explore this route only for special trips or once-in-a-lifetime trips to avoid accumulating debt that is hard to pay off. The bottom line is that, like any other loan, these loans can wreck your credit score if you are not careful about repayments. So only borrow what you can comfortably pay off and on time.

If paying for a holiday or special occasion with money you’ve already saved isn’t an option, it doesn’t necessarily mean you have to miss out. You can still finance the holiday celebrations, time away or trip you've been dreaming of all year thanks to a personal loan.

But what if you have a bad credit score? With a patchy credit history, you might think securing any sort of personal loan (holidays and Christmas included) will be difficult. Perhaps you're wondering if it's even worthwhile to approach a lender with an application.

It is a reassuring thought that holiday loans and Christmas loans are actually common, and that many lenders have options for applicants who need a personal loan with bad credit.

It’s very common for a lender to either have a specific personal loan product for travel or for Christmas expenses, or to allow their standard loan to be used for those purposes.

Holiday personal loans can also be secured or unsecured. Unsecured holiday loans are more common since holidays aren’t a tangible asset, but in some circumstances they will be secured against a car or other physical possessions.

Unsecured holiday loans

An unsecured loan is given without the need for the borrower to put up "collateral" or something they own as security.

As a result, if you default on an unsecured loan, the lender can’t automatically seize your property or possessions. However, don't assume failing to make payments on your unsecured loan has no consequences or that you’ll be able to escape debt. In some cases, a lender could seek legal action resulting in a court order for the sale of one or more of your assets.

Unsecured personal loans generally have higher interest rates than secured personal loans. They’re often chosen by borrowers without valuable assets or whose assets have already been used to secure other loans.

Secured holiday loans

Taking out a secured holiday loan may help you access a better interest rate or a more generous loan amount.

However, secured loans require you to put up a valuable asset as collateral. If you can’t pay the loan back, a lender can sell the asset to recover some or all of their money.

For applicants with less than ideal credit scores, a secured loan may be a better option than an unsecured loan since it offers the lender collateral if you fail to make repayments.

Holiday package loans

Some lenders offer loans that are exclusively tailored to travel. You may be able to get an interest free term on your loan or be offered the option to stretch payments out over the months before you depart.

Travel agents and airlines have also entered the market to offer holiday loans if you book your trip with them. They offer benefits like deferred payments, discounted insurance or interest-free financing to pay off more expensive flights.

The drawback is that the loan terms may be less attractive than those of a personal loan, and you'll be restricted to booking your flights, accommodation and other travel services through one travel company, which could be more expensive than booking them independently.

Fixed or variable interest rate loans

One of the most important features of a personal loan (holiday, travel and Christmas loans included) is the interest rate and this includes whether the term is fixed or variable. Both types come with pros and cons.

Fixed interest rate loans

For fixed rate personal loans the interest rate and your repayments stay the same for the entire length of the loan. You can rest easy knowing that your rate won’t go up unexpectedly, allowing you to manage your money with more certainty.

However, it's important to check the terms and conditions of fixed rate personal loans to see if there are any extra fees such as an “exit fee” or "early repayment adjustment" that compensates the lender for the loss they will suffer if the loan is repaid early.

Variable interest rate loans

For variable rate personal loans the interest rate can rise or fall depending on market conditions and decisions by the Reserve Bank.

If interest rates go down, you can save on the amount of interest you have to pay back. Of course, there’s always the risk that the rate will rise and your repayments will go up with it.

Variable rate loans can give you more flexibility in paying off your loan, with some lenders allowing you to make unlimited extra repayments if you have surplus cash. With this type of flexibility you could be in the enviable position of paying down your loan earlier and without penalty if finances permit.

After choosing the type of loan you want, comparing rates and fees and checking your credit score you’re ready to apply for your loan. You can use a site like ClearScore to compare the range of providers and find the best deal for you that’s tailored to your credit score.

Each lender will let you know exactly which details you have to provide to apply for a holiday loan, but the information and documentation typically includes:

• Your personal information such as name, address, and contact details
• ID and proof that you are at least 18 years of age
• Residency status
• Proof of full-time or part-time employment and income
• Bank statements and details of assets and liabilities
• A good credit history and proof of solvency.

In the case of a travel loan you may have to give the lender information about where you’re going and for how long.

Many holiday loan application and approval processes are 100% online, making it easy for you to approach a lender and get a holiday loan without having to navigate a tonne of paperwork.

It pays to do your research and be prepared before you apply for a personal loan as rejection from a lender can further impact your credit history. You need to plan carefully if you’re looking for a loan with bad credit.

The major attraction of holiday personal loans are that they’re a simple and convenient way to borrow funds for travel or a special occasion like Christmas. Managing them responsibly might give you the added benefit of improving your credit score by showing that you can consistently meet loan repayments.

Almost any financial product has pros and cons, and holiday loans are no exception. These are some you should be aware of:

Pros:

• The interest rates can be lower than other financial products like credit cards
• Fixed limits and terms encourage you to borrow wisely and within your means
• There are a wide range of lenders and loans and you can get some really good deals in the current market.

Cons:

• Entering into any sort of debt has implications for your future credit rating if not managed properly
• While there are great deals around, holiday personal loans charge higher rates on average than other type of loans
• You may incur unbudgeted-for fees and charges in certain circumstances
• You may have to start making the repayments while travelling.

Your credit score helps lenders determine your creditworthiness. Whether you are approved or rejected for a holiday loan also depends on your credit score.

With ClearScore, not only can you check your credit score and get free access to your credit credit report, but we also connect you with Australia’s leading lenders so that you can quickly and easily get the best deal on holiday loans and more.