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You want to go on holiday abroad and pay later ... but be aware of the risks

·5-min read
<span>Photograph: Jeff Saunders Travel Stock/Alamy</span>
Photograph: Jeff Saunders Travel Stock/Alamy

We are now free to go on holiday, but it will cost us. As the government unveiled the list of countries British holidaymakers can go to without having to quarantine on their return, demand jumped. This, combined with limited flights, has led to a sharp increase in prices for trips to “green list” countries such as Portugal.

At the same time, the number of people looking to borrow to finance their holiday has increased, suggesting they are willing to spread the cost in order to get away.

According to comparison website MoneySuperMarket, searches for loans to pay for holidays between 5 and 11 May – when the list was announced – were double those at the start of April, when details of where people could go were not available.

“The increase in recent weeks comes as little surprise given the majority of us have missed out on a holiday abroad over the last 18 months or so,” says Sasha Evans from Moneysupermarket.

And spreading the cost has never been easier, with new financing options coming on to the market.

But money advisers are urging caution and warning holidaymakers not to overburden themselves for a few weeks in the sun.

New ways to pay

There was a surge in bookings and prices both before and after the announcement of the countries on the green list. A BA flight from Heathrow to Faro went from £237 to £448 within two days, while a Ryanair flight from Stansted to Porto was up from £15 to £233 in the space of 24 hours.

Countries on the green list are over a third more expensive to go to for seven days than those on the “amber” list, according to an analysis by travel agency Butter.

In the past, those who could not afford to pay for their break in one go may have used a credit card or personal loan, but the last few years have seen the launch of “buy-now-pay-later” style credit, similar to what Klarna offers online shoppers.

London-based Fly Now Pay Later operates on the websites of travel companies such as Lastminute.com and Malaysian Airlines, letting consumers pay over periods of up to a year. There are two methods of credit – either interest-free, where you pay in a small number of instalments, or where interest is charged, where you pay over three to 12 months.

Loans can be taken out for between £200 and £4,000, with the average being £1,500, says founder Jasper Dykes. He says the majority of customers are offered an interest-free plan with larger repayments over a shorter term, but most opt to pay interest over a longer period. The APR – the interest rate plus any other fees – ranges from 19.9% to 35%, depending on the risk that the client will default on the loan. Those with a history of bankruptcy, or financial distress, will typically not be loaned money. In contrast, a search of rates by the Observer on personal loans for £1,000, to be repaid in a year found APRs of between almost 14% and 25%.

On Fly Now Pay Later there are late-payment fees of £12 and defaults may be registered with credit reference agencies. Dykes says that the “vast majority” of customers are offered an interest-free loan with a shorter repayment period but most opt to pay back with interest over a longer period. He expects there to be significant demand as more countries open up, even though many people have money saved from last year. “A lot of the time we find that our consumers are more comfortable just spreading the cost,” he says.

Butter claims to be the UK’s only “buy-now-pay-later” travel agency. It spaces out repayments over 10 instalments without interest. “We make a commission on the sale of the product in the same way a traditional travel agent would. So we don’t need to charge anything on top for financing their purchase and we don’t hit them with any hidden fees,” it says.

About 10% is paid at the time of booking and then there are monthly instalments via direct debit. There is no minimum amount loaned, but the maximum is £3,000. Applicants have to be over 18 and have a salary of £15,000 a year or more.

Using your credit card

Putting the holiday on a credit card carries the risk that the debt for this year’s holiday remains for many years to come, if only the minimum amount is paid off.

Sara Williams, the author of Debt Camel, a blog advising people on money problems, says: “The biggest problem may come if people are too optimistic about what they will be able to repay each month, and don’t factor in all the extra costs, from parking at the airport, spending money they will need on the holiday and those Covid-19 tests they may have to take before they fly.”

She says borrowing through a scheme with repayments structured over a short period can help people clear the debt, but warns that borrowers should beware of the effect on their credit score if they miss payments on a buy-now-pay-later scheme.

Rates to repay a credit card vary significantly. The standard APR in the UK is 23%, according to consumer group Which?.

Damien Fahy, of personal finance site Moneytothemasses.com, says the most prudent way to finance a holiday is to save for it in advance.

“But given the financial risks associated with booking holidays, as a result of the pandemic it makes even more sense to pay using a credit card, and then pay it off immediately, to ensure you benefit from section 75 of the consumer credit act,” he says. Section 75 provides extra legal protection when you buy goods or services costing £100 or more on your credit card.

“If you can’t clear the debt immediately, then use a 0% purchase credit, which would allow you to clear the debt over time at no cost.

“By using a credit card it ensures you could potentially receive a refund from the card provider should a company go bust.”