Term Deposit vs. Travel Loan: What's Best for Financing Your Next Trip

Travelling is a pastime that's enjoyed by all sorts of individuals. For many, it's a welcome break from the hustle and bustle of the daily grind. And with travel periods coming only on occasion for some, this overseas reprieve should be carefully planned for you to truly make the most of it. The itinerary isn't the only consideration you'll have to make—far from it. You'll also have to pay close attention to your finances when you travel.

Term Deposit vs. Travel Loan: What's Best for Financing Your Next Trip

From airfare to accommodations to tours and shuttle rides, there are a plethora of expenses you'll be met with throughout the trip. Some families have a long-term travel fund to withdraw money from for this activity. However, a trip may occur so soon that trip organisers will have to consider alternative financing options. Two options that these travellers can consider are term deposits and travel loans. Both can be used to finance your travel but in totally different ways. This article will explore how you can finance your trip using both of these methods, and the pros and cons of each. Let's begin!

All About Term Deposits

A term deposit is a fixed-term investment wherein a person puts some money into a bank to earn interest over a predetermined timespan. Banks offer term deposits since they typically use their customer's money for lending. Term deposits help banks predict fixed money movements without clashing with the depositors' own withdrawals. As a form of reward, interest is essentially compensation for the money lent by the bank. This is different from a traditional savings account in that the money placed in a term deposit is locked into the account until the term period is up. While you can technically withdraw the money before the period is up, this forfeits your rights to earn additional interest—which is the primary purpose for people to put money in a term deposit in the first place. In most cases, a penalty is also imposed which can offset any profits gained from the initial interest earned.

The terms of a term deposit vary depending on the financial institution providing it. Some offer short-term maturities that last a few months but provide an enticing interest rate. The downside is that these contracts may require a larger minimum deposit. Conversely, long-term term deposits also exist and provide people with a lower minimum deposit—which helps reduce the barrier to entry. The downside of this agreement is a longer-lasting contract and small monthly interest earned.

All About Travel Loans

Travel loans are a type of unsecured personal loan that you can take from a financial institution for travel purposes. You can typically borrow anywhere between $4,000 to $50,000 depending on your credit score, your request, and a list of other criteria that the lender may impose on you. Once you and the lender agree on a rate, the loan is paid as a lump sum and directly deposited into your bank account. How you plan on using the loan is solely up to you. If you want to spend your loan on airline seats to a country on the other side of the world, a travel loan is perfect for that.

If you need to amass pocket money or funds for must-have travel accessories for a week-long holiday, this loan's got you covered too. Of course, a loan is still a loan—and you'll have to meet the obligations imposed by the institution that you've loaned in. This includes both the principal and the interest rate you've been imposed to pay off the loan. The lender will typically impose a fixed recurring term period for repayment. This is automatically performed, meaning you don't have to worry about accidentally missing a repayment deadline. These repayment terms can be imposed weekly, fortnightly, or monthly, depending on your agreement with the lending institution and your income status.

Pros of Term Deposits

Here are the benefits of taking term deposits when travelling.

It preserves capital

Term deposits are great for helping keep your capital secure. You're not putting your money in investment vehicles that can go south when surrounding variables like the economy are underperforming. Instead, you're putting it in an account that'll only grow over time, which is an excellent way to get a predictable stream of travel funds over time. Use Westpac's term deposit calculator for an accurate assessment of your earnings through a deposit period.

You can plan for it

Another perk of term deposits is their consistent returns. You'll know for certain how much you'll get each period. You'll also know how long your terms are in general. This makes it easy to plan out your future travel plans since you can budget ahead of time for it.

It doesn't hurt your other financial obligations

Another perk of term deposits is that saving up for it isn't going to interfere with your budget. You won't lose capital by putting money in a term deposit. This is unlike a personal loan wherein you will lose money over time due to the interest rate. If that appeals to you, then consider setting up a term deposit.

Cons of Term Deposits

These are the downsides of term deposits:

It's slow to start

While it's true that term deposits have fixed earnings, these earnings are often so slow that you may not accumulate enough to reach your travel savings goal on time. This is especially true if you're starting with little capital to begin with. In such cases, it may be ideal to seek out other wealth-growing methods.

It's a long game

Another negative of term deposits is their length of tenure. You'll be locked into a multi-year contract that won't even allow you to withdraw in between lest you get a penalty fee. The earnings may not even be enough for travelling—as you'll need a huge deposit to begin with to get a workable travel fund from the interest earned.

It may not outpace inflation

Another con is that the interest earned from your term deposit may not be enough to outpace inflation. While term deposits do enjoy better interest yield compared to traditional savings accounts, it's often not too large of a difference. Inflation typically outpaces savings account interest rates, and if the year is particularly bad, then term deposit account holders may experience a net loss too. In such cases, other investment vehicles may be better options.

Pros of Travel Loans

Here are the benefits of taking out a holiday loan:

Predictable repayment scheme

Travel loan providers typically impose a fixed recurring fee every period. Neither the principal nor the interest will change in value throughout this time. This amount will stay the same throughout the loan—providing you with a predictable amount to pay at specific dates. If you're rigid with your budget, you can easily determine if taking out a travel loan is something feasible given your unique financial situation.

It quickly gives you money

If you're short on cash and have a holiday schedule that is fast approaching, a travel loan is the perfect personal loan to get for a quick fund injection. After signing the agreement with your loan provider, you can expect a deposit in your account in five days or less. This quick fund injection makes holiday planning a breeze.

It gives you repayment flexibility

You may be met with a sudden emergency or surprise expenses in the days leading up to the holiday. This can drain your savings, which can leave you more than a couple of dollars short of a spectacular and stress-free holiday. One saving grace is a travel loan. This loan can bring you money near-immediately and spread out the cost of the loan to a more reasonable time frame.

Cons of Travel Loans

Loans can be good or bad, depending on how you manage them. Here are the downsides of travel loans:

Added costs

The immediate effect of obtaining travel loans is easy to see. That said, as with other loans, it can come with a price—literally. Travel loans have a slight markup compared to paying for your holiday out of pocket because of the interest expense. This interest expense can cause the total cost of your travel to increase by a couple of hundred dollars or so overall. As such, if your capital is at healthy levels, it's best to avoid loaning entirely and just use money out of pocket.

Added debt obligations

Debt can be good when leveraged correctly. However, in the wrong hands or when bad circumstances occur, it can be a major financial health disruptor. When you're unable to pay your loan on time, you can be imposed additional fees that can increase your overall expenditures. This can make it harder for you to stay on top of your finances, potentially causing a domino effect of financial problems down the line.

Potential for a tainted credit score

Another issue you can face is a mark on your credit score. Sudden debt obligations and delayed debt payments can taint your credit score. These two are major red flags for creditors on your ability to handle your finances. When your credit score is lowered, this can make it harder for you to get a good loan deal in the future.

What about you, have you ever needed a term deposit or a travel loan? Feel free to share any tips & advice below!

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ABOUTME

We overland. We eat plants and fungi. We live outside as much as possible. We are all connected. A female travel blogger overlanding and writing about ecotourism, ethical and sustainable travel, socially conscious travel and housesitting. An online travel magazine since 2015.