Rethinking Personal Loans for Travel: A Cautionary Tale
Australian travellers are increasingly considering personal loans to fund their winter getaways, including trips to Europe and the US. This trend has sparked discussion about the implications of borrowing significant amounts, sometimes upwards of $50,000, to finance vacations.
For many holidaymakers, the decision to take out a loan is prompted by the desire to escape the winter chill without the lengthy saving process typically associated with travel. Tax expert Kiki cautions that this approach may have severe future financial consequences, particularly for those aspiring to own homes. She notes, "Taking out a personal loan will certainly impact your borrowing capacity." The risks are particularly high in today’s stringent lending environment, where banks closely regulate borrowing amounts.
Reflecting on social media discourse, one TikTok user, Brooklyn, shared her astonishment at the revelation that individuals were securing loans of up to $50,000 purely for leisure travel. Brooklyn, who had budgeted $16,000 for a ten-week trip to Europe for two, found it hard to comprehend how some managed such lavish expenses. She posed questions regarding the travel financing habits of these borrowers, speculating whether they utilised sneaky savings tricks or accrued credit card debt.
Data from Finder indicates a rising trend of Australians relying on personal loans for travel. In January 2020, approvals reached $35 million for holiday-related loans, a figure that diminished during the pandemic but has gradually picked up since mid-2021, with $59 million approved as recently as July 2024.
Experts warn that this trend may be driven by a desire to ‘keep up with the Joneses’, leading over two million Australians to resort to debt just to match the travel spending of peers. Personal finance expert Sarah Megginson notes, “Many Aussies are drowning in debt to travel,” emphasising the long-term financial ramifications of borrowing for holidays.
Although some individuals express nonchalance about such financial commitments, believing that life should be fully experienced, critics like Kiki highlight the potential stress of returning from a holiday only to confront an abundance of debt. She advocates saving in advance to avoid the arduous task of repaying loans, which may stretch across two to five years. Carrying such debt can adversely affect both finances and mental well-being.
For those determined to travel without incurring massive debt, Kiki suggests practical strategies to minimise costs. These include booking flights in advance, scouting for deals on accommodations across different platforms, exploring free activities, and timing trips outside peak seasons. Additionally, placing savings into high-interest accounts can enhance funding capabilities.
Credit cards, often compared unfavourably to personal loans, can also be a double-edged sword. When used wisely, credit cards can yield frequent flyer points and offer travel insurance options. They typically come with interest-free periods for full repayments, an advantage not usually available with personal loans, which can carry higher interest rates ranging from 5% to over 20%.
However, Kiki warns of the perception issues associated with relying on loans for travel. When applying for mortgages, banks may question the purpose of significant loans, especially if labeled as extravagant, potentially casting shadows on borrowers’ financial stability. This stigma persists for both personal loans and credit card debts, albeit with the latter providing clearer insights into spending habits.
Ultimately, the consensus among financial experts urges Australians to weigh the pros and cons of borrowing for travel. While vacation experiences are invaluable, it’s vital to approach financing with caution to safeguard future financial health. Personal loans might appear appealing, but the burden they impose can linger long after the holiday bliss has faded.
