Travel Now Pay Later: Could Your Dream Holiday Become A Debt Trap?

Summers are here and those who haven’t already planned a trip to the hills may be rushing to do so now. Last-minute travel plans often entail last-minute scurrying around for travel mates or funds. This is especially true for those who may be just starting out in their careers and students looking for a break after their exams, as they may not have adequate savings or a travel kitty in place. Also, booking hotels and travel may be dearer at the last hour.

Vishnu Kalarikkal from Kerala’s Malappuram, who works as a senior operations associate at a social media platform, didn’t plan ahead in 2021 when he took a trip to Manali with his batchmates from college. Due to their last-minute planning, their travel and hotel expenses were significantly higher than the usual rates. While Vishnu had adequate money to fund his trip, not everyone may have that flexibility.

So, what do you do for funding such last-minute trips? Lenders and travel companies understand this need and many of them are now offering travel now pay later (TNPL) schemes. These are essentially a form of loan or credit that you can take to book a trip and then pay later in instalments within a specified period. These digital credit options are offered by partner banks or non-banking financial companies (NBFCs) of travel aggregators.

But are they the right choice? The answer to that would depend on factors such as the cost and convenience, and how you balance them.

Rising Popularity

TNPL schemes are now gaining popularity. They were launched on the back of the success of buy now pay later (BNPL) schemes in the retail space in the last couple of years.

Several travel aggregators like MakeMyTrip, Expedia, SanKash, along with a host of travel agencies now offer such solutions.

Says Abraham Alapatt, president and group head, marketing, service quality, value-added services and innovation, Thomas Cook (India) and SOTC Travel, “Flexible payment options like TNPL have witnessed an over 25 per cent increase after the pandemic. TNPL offers these customers a strong proposition because they allow the flexibility of repayment over three, six, nine or 12 months with no-cost equated monthly instalments (EMIs). The average transaction size is around Rs 1.5 -2 lakh.” SOTC Travel is held by travel company Thomas Cook (India).

SanKash claims of having lent over 12,000 travel loans. In November 2022, it reported a 102 per cent increase in loan amounts from travellers, compared to the previous quarter.

While many companies provide TNPL services for flight bookings, CASHe in partnership with IRCTC offers TNPL for railway travel as well. It saw an uptick in the segment within a few days of the launch.

Says Yashoraj Tyagi, chief technology and chief business officer, CASHe, “The introduction of the TNPL payment method on the IRCTC Rail Connect App has got a positive response from Indian travellers, with user registration growing 25 per cent month-on-month. The TNPL option on the IRCTC Rail Connect app allows users to repay the amount in three to six interest-free instalments.”

Besides travel companies, a few large banks offer similar products. For instance, you can use the FlexiPay payment option from HDFC Bank on MakeMyTrip by using its debit card.

The Draw: Many from the millennial and Gen Z generations are unable to save up for travel, given limited income and rising financial obligations, like student loan, housing cost, etc. TNPL gives them an easy-to-take loan option.

One of the major draws for TNPL loans is the short onboarding period and minimal paperwork. For example, one of Makemytrip’s TNPL offer claims it can onboard customers in two minutes without any paperwork.

Alapatt describes the process at Thomas Cook (India), “On finalisation of holiday, the travel company connects the customer with the fintech partner who then checks the customer’s eligibility (via documents like government ID, salary, bank statement, etc.). Once approved, typically within four hours, the customer pays a deposit to the company upfront, with the balance amount paid three to six months post approval, duration being basis specific plan/offer).”

Beware Of The Cost

All the ease comes at a cost, of course, if you are not vigilant enough. The loans have an interest-free period of one to six months, depending on the lender, but if you fail to repay within that period, there may be penalties.

Defaulting on the instalments will attract a penalty of 2-3 per cent in monthly interest or even a late fee with each default. As these are generally unsecured loans, the interest rates are high. If you have a bad credit score, the interest rates could increase further.

Says Tyagi, “When availing of TNPL services, it is essential to make repayments on time in a disciplined manner. Failure to do so may result in incurring late payment fees. Adherence to the agreed-upon repayment schedule is crucial to avoid these additional charges. Not meeting payment obligations on time can negatively impact your credit score.”

The loan tenure varies from three to 18 months, and interest is mostly applied after six months. The interest rates may range from 13-30 per cent or more annually, depending on the duration, amount, and loan provider.

Some lenders give a grace period for equated monthly instalment (EMI) payment, but the penalty starts thereafter. For example, CASHe offers travel loans under the personal loan category and provides a five-day interest-free grace period at the end of each month to pay the EMI. A 0.7 per cent interest fee penalty is charged for any subsequent payment delays. It applies monthly interest rates of 2.25-2.5 per cent (equivalent to a reducing balance interest rate of 3.71-3.85 per cent per EMI) on the total loan.

SanKash offers a no-cost EMI of three to six months. A one-time processing fee of Rs 2,999 is charged for any loan tenure. Its website provides a calculator that shows that if you take a loan of Rs 1 lakh for nine months, your EMI will be Rs 12,111. It means you will pay Rs 1,08,999 in nine months. Of this amount, the interest payment is Rs 8,999.

Other Things To Be Wary Of

TNPL can fulfil your last-minute funding need for a trip with friends but remember that it is just another form of loan, and the repayment may dent your monthly cash flow. That’s especially true if you are planning for a foreign trip and have taken a larger loan.

It is also essential to note that aggregators may not allow credit on every expense for the trip. Some may only give credit on packages available on their platforms, while others won’t let you book flight tickets or pay visa fees through the pay-later option.

Also, if a trip is cancelled or delayed, your loan may still be due, and you may have to engage in a cumbersome process to get the refunds and pay it off or your credit score might get affected.

“Consumers should opt for such offers via a trusted travel partner and do a careful check on the time limit for repayment, interest rates, deposit amounts, cancellation charges, etc. It is important to evaluate the terms and conditions before finalising on travel loans,” says Alapatt.

Should You Go For It?

TNPL may be useful for group bookings, as it gives more time to gather funds from group members. It can also work for those who can repay within the interest-free period.

Another option you could look at if you can’t avoid borrowing for an urgent trip is travel credit cards. Says Sridhar Keppurengan, business head, cross-border payments, India and South Asia, Visa, “Credit Cards comes with added rewards and discounts at select travel partners. Further, they allow large-ticket purchases to be converted into EMIs over several months, usually 12 (sometimes longer), which is more than the TNPL offerings. Credit cards, typically, offer an interest-free credit period of 45 days or more, whereas TNPL generally offers 15 days or less.”

But borrowing for travel should be the last option as interest payment can spiral in TNPL plans as well as credit cards.

Says Suresh Sadagopan, principal officer, Ladder7 Wealth Planners Pvt. Ltd, a Sebi-registered financial planning firm, “If one does not have money for a discretionary item like travelling, it is preferable not to do it. Loans should be obtained for large-ticket purchases such as a home or productive ones such as education. For anything else, it is wiser to save money before spending it.”

It’s essential to budget and plan ahead for travel expenses to avoid overspending and financial stress. Never borrow just because a loan is easily available.

aaron@outlookindia.com