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Interest-free holiday or debt-stination?

05 March 2020

Interest-free holiday or debt-stination?

Summertime can be a financially and emotionally draining time, even if you did get away for a relaxing break. You’ve probably overspent on socialising, Christmas gifts, Boxing Day sale “bargains”, or on that amazing OS holiday. As a result, your bank account and credit card are in a fragile state. What’s worse, you’re most likely craving your next dream vacay already.

Securing that super cheap airfare or holiday package you’ve just seen can be a challenge. But you do have options. Buy now, pay later (BNPL) credit is one way of paying for your next holiday, with many travel agents and companies offering interest-free terms, as well as popular BNPL services like Afterpay and zipPay. However, like any credit, there are a few things to watch out for to ensure your next dream holiday doesn’t become a nightmare debt-stination that costs you more.

Know what you’re in for

The appealing things about BNPL holidays are that you can go almost immediately and they can be interest-free – as long as you meet the instalment plan deadlines. Just make sure you read the terms and conditions before signing up. Know that if you only pay the minimum monthly repayment, you won't pay off the balance in full within the interest-free period. Plus, the interest rate charged can be as high as 29 per cent if you miss a payment or haven't paid off the balance by the end of the interest-free period. These rates are more than double the interest rates charged by most credit cards and much more than personal loans.

Watch out for the end of the interest-free period

One thing to remember while you’re sipping on that poolside Mai Tai in Thailand is that the credit provider doesn’t have to remind you of when the interest-free period runs out. You’ll need to keep track of this yourself with reminders on your phone. And as we’ve said, if you fail to repay the total amount by the end of the interest-free period, you’ll be hit with big interest charges. To avoid this, always pay more than the minimum repayments to pay off the debt early.

Interest-free doesn’t mean cost-free

Despite ads screaming “no deposit, no interest, no repayments until …”, interest-free credit usually comes with some fees. These can include things like establishment fees, extra payment fees, late repayment fees, monthly account keeping fees and payment processing fees. Over longer terms, these fees can add up to the equivalent of being charged interest.

Is it a one-off loan or another new credit card?

Another thing you need to be wary of is that many interest-free deals automatically come with a credit or store card – usually with a higher limit than the holiday you originally financed. BNPL credit may also restrict you on how you spend the money. They may only cover airfares and accommodation purchased though the agent. Of course, using an interest-free credit card for lots of trip purchases will create multiple repayment due dates and amounts that require a lot more energy to budget for successfully. Cash advances on the credit card will also attract higher interest, so if you need spending money other options should be considered.

Taking a more personal holiday route

If you really need a holiday now and don’t have the savings, a personal loan could be worth considering. Personal loans offer a lot more certainty than other forms of credit. Repayment amounts, schedules and terms are set out upfront, which means you can actually pay off your holiday within a realistic timeframe. They also give you the flexibility to choose your term and repayments to suit your budget. A holiday personal loan provides you with a lump sum of cash that can be used however you like – airfares, accommodation, last-minute tours and spending money. Paying for your holiday with a personal loan could also be cheaper, as interest rates and fees are usually much lower than credit cards. Having said that, you are paying interest on the full loan amount from the outset.

Whether you’re thinking of an Easter getaway to the States, or catching the beauty of spring in Japan or Europe, paying for your holiday with any form of credit should be carefully considered. Setting up a savings plan and using interest on your savings will help ensure you’re not carrying a larger than expected financial burden while you’re on holidays and beyond.

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