Holiday loans: how much are they and how can you get one?

Is it a winter ski escape, cruising the slopes by day and sipping hot chocolate by the fire at night, that you’ve been pining for? Perhaps it’s a tropical vacation sipping cocktails by the pool in far north Queensland? Or are you keen to check out some of Australia’s iconic holiday destinations, like Uluru or Victoria’s Great Ocean Road?

Whatever type of holiday tickles your fancy, you’ve had more than enough time to daydream about your ideal getaway over the last 18 months, without much opportunity to do anything about it.

Now it’s time to put plans into action and start planning your much-needed getaway. But how are you going to pay for it? This is where a holiday loan can come in handy.

What is a holiday loan and how do they work?

Now that Australia is somewhat returning to normal, we’re able to start making travel plans again – and that means planning how we’re going to pay for it.

One option is to use an unsecured personal loan, known as a holiday loan, to cover your flights, accommodation and holiday expenses.

An unsecured personal loan means you don’t have to offer an asset as security in order to get access to funds. A secured loan has an asset linked to it (such as a car or property), which the lender can take possession of or oblige you to sell, if you fall behind on your repayments.

Generally, most holiday loans are unsecured loans. And before you apply, it’s always important to do your homework as there are many different lenders out there who have very different eligibility criteria.

Generally, holiday loans can range from as small as $500 right up to $50,000, with loan terms ranging between 6 months up to 7 years, but always check the lender’s eligibility criteria first before applying to avoid an unnecessary credit enquiry on your credit file.

How much does a holiday loan cost?

When you apply for a holiday loan, you can get either a fixed interest rate (one that stays the same over the entire loan period) or a variable interest rate (which can change at the lender’s discretion).

There are fees and charges, like application fees, and late payment fees if you don’t make your monthly payments on time. Typically, interest rates vary from 8% p.a. to 29.9% p.a, depending on the type of loan you opt for and your personal credit history.

Generally, the better your credit score, the lower the interest rate you’ll pay. If you have bad credit or a chequered credit history with a number of defaults, you will generally be charged a higher interest rate.

What are the pros and cons of a holiday loan?

Holiday loans can be beneficial if you’re planning a bigger trip and you want to pay it off in affordable, ongoing instalments.

For instance, let’s say you want to take off on a family campervan holiday around Tasmania. You work out the trip is going to cost around $6,000, and so after researching your eligibility (due to having an average credit score) you apply for a fixed-rate, 9 month personal loan with an interest rate of 15.9% p.a.

This would mean your repayments would work out to be $181 per week, which can be an affordable way to budget for your holiday and means you can get travelling sooner, rather than waiting to save the $6,000.

This can be preferable to the payment method that many Aussies turn to when booking a holiday: ‘fantastic plastic’. While credit cards may be convenient, they’re an expensive way to pay for something unless you can pay the balance off in full before interest is charged, which would be very hard to do with a $6,000 debt. If you can’t fully repay it, you could be paying a premium of up to 21.5% p.a. interest (sometimes even more) for your holiday.

That said, when taking out any type of loan, it’s worth considering how much interest you’ll pay and whether there are other options that could end up costing you less in the long run. It may be more affordable or more suitable to:

● Refinance or draw some equity from your home loan, for larger holidays; or

● Wait until you save up for the holiday with your own money, so you’re not paying any interest premium at all.

And don’t forget that the holiday loan interest rate you may be offered, usually depends on your credit score. Before you apply, it’s worthwhile to obtain your credit score so you know which lender you’re more suited to. The good news is there are ways you can improve your credit score. Start with your score and educate yourself about all of the options in front of you, so you can make the best decision to suit your unique circumstances.

Written by Sarah Megginson

Sarah Megginson is senior editor of home loans for Finder.