Should You Take a Loan for Your Vacation? Exploring Reverse EMI Options

The Changing Landscape of Travel Aspirations

With globalization, the ambitions of many Indians have significantly increased. In the past, we were content with goods imported from abroad, but now we aspire to visit the countries from which these products originate. During my childhood, a trip to a nearby religious site was considered a vacation, and we eagerly awaited it. However, this is no longer the case for my daughters. Today, Indians travel not just within the country but to every corner of the globe.

Understanding Travel Expenses

Every journey involves costs such as airfare, hotel accommodations, and shopping, which are integral to the travel experience. While these expenses can be covered through savings, some individuals opt for loans or credit facilities offered by travel operators, repaying them in EMIs. Personal loans, which are unsecured, typically carry interest rates ranging from 15% to 21%. This raises the question: should you take a personal loan at such high-interest rates for travel, or utilize a travel company's plan where the interest is included in the tour price? Let's delve into this.

Should You Borrow for Vacations?

The evaluation of any loan can be approached from two perspectives. Firstly, a loan should meet one of the following criteria: it should either enhance your income (like an education loan) or assist in acquiring or increasing the value of an asset (such as a home loan). If a loan meets this initial criterion, it must then be assessed for its necessity and whether it is worth taking. The loan should align with your lifestyle, income, and objectives.

Planning Vacations Wisely

The true joy of a vacation comes from planning ahead and saving regularly. A holiday that leads to financial strain later is counterproductive. The idea of returning from a trip only to bear the burden of EMIs is not how I define a vacation. The table below illustrates the EMI for a personal loan of ₹2.5 lakh at an annual interest rate of 18%.

Exploring Reverse EMI for Vacations

Instead of taking a personal loan, you can plan your vacations in advance and create a smart saving and investment strategy. Just as you repay a home loan through EMIs, you can consider a reverse mortgage on your home after the age of 60 to receive funds as EMIs from the bank. For vacations, you can either take a personal loan or use a travel operator's EMI plan. However, I recommend paying your future vacation EMIs now. Under this 'Advance/Reverse EMI' scheme, you can start investing in mutual funds, and once you accumulate the necessary funds for your dream holiday, you can enjoy it.

How Reverse EMI Works

Under the reverse EMI scheme, you will invest a fixed amount monthly in a mutual fund house, equivalent to what you would pay as EMI for a personal loan or travel operator. This monthly investment will accumulate into a substantial amount that will help fund your dream vacation. Essentially, reverse EMI operates like a Systematic Investment Plan (SIP) in equity or debt funds, depending on your risk appetite and the timeline for your vacation.

Investment Strategies for Vacation Planning

If you prefer to avoid risk, consider investing in debt or income funds. If you can take some risks but plan to travel within the next three years, debt funds are still advisable. Equity investments can be volatile and may lead to losses in the short term, jeopardizing your plans. By investing in debt or income funds, you can expect returns of around 8-9%. Debt funds have historically provided an average annual return of 9% over the past five years.

Comparing Costs and Returns

Since income funds typically allocate 15% to 20% of their assets in equities, they offer both security for your investment and potentially better returns. Over the last three years, income funds have yielded an average annual return of 10%. The table below shows how much you could accumulate by investing an amount equivalent to your EMI in debt funds over five years, considering an 8% inflation rate.

Long-Term Investment for Greater Returns

If you can postpone your vacation for more than three years and up to five years, consider starting a SIP in equity hybrid funds, which have averaged a 21% annual return over the past five years.

Conclusion: Smart Vacation Planning

This entire discussion and calculation clearly indicate that planning and investing for vacations is a far more prudent choice than taking on debt. Not only will this approach make your vacations more enjoyable, but it may also allow you to extend them due to having more funds available.