The holiday travel season is fast approaching, and cash-strapped, credit-adverse consumers now have a few new ways to pay for flights at any time of year. This is good news for some groups, millennials in particular, who have shown a taste for travel and a distrust of credit cards.
[See: 11 Easy Ways to Slash Travel Costs.]
In August, flight booking site CheapAir.com announced a financing program with lending company Affirm. The program allows travelers to finance flights through monthly payments instead of paying upfront. Plus, loans above $100 are available with three-, six- or 12-month loan terms. Interest rates range from 10 to 30 percent APR depending on your creditworthiness, and there is no prepayment penalty for paying off the ticket early. Affirm also has a partnership with Expedia (including Travelocity, Orbitz and Cheaptickets) offering loans for hotel bookings and packages above $200 under the same loan terms.
“When Affirm originally launched, which was a few years ago, we expected to attract folks who had an aversion to using credit cards or younger millennials who didn’t quite have credit,” says Christina Ra, head of communications at Affirm. “In reality, what’s happening is most Americans carry a balance on their credit card. They like the fact that they see upfront what they’re paying [with Affirm, as opposed to revolving credit that’s not as transparent]. We actually spread pretty evenly amongst millennials, Gen X and boomers,” Ra says.
Meanwhile, startup Airfordable, which launched earlier this year, allows consumers to book flights through their choice of travel site (think: Expedia, Priceline, Google Flights or an airline’s own site), lock in the price with a deposit and pay for the flight over time. Here’s how it works: You send a screenshot of the flight details and Airfordable charges an upfront layaway fee between 10 and 20 percent of the ticket cost. If you have to cancel your trip, the fee is nonrefundable, but payments made beyond that are refunded as a credit towards your next booking.
Unlike CheapAir.com’s program with Affirm, which allows you to continue making payments during and after your trip, Airfordable does not release your electronic ticket until you’ve made your final payment or run a credit check. Affirm, on the other hand, bases its interest rate on the consumer’s creditworthiness and performs a soft inquiry on potential borrowers’ credit.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
“[A prospective borrower’s] FICO score plays a role but not a primary role,” Ra says. “We ping a bunch of databases. We apply our own underwriting and fraud detection to make a decision.” Affirm reports repayments to the credit bureaus and does not charge prepayment penalties or compound interest, Ra adds.
Still, some financial experts caution that you may be better off saving up for a trip the old-fashioned way rather than paying interest or a layaway fee upfront.
“It’s not appropriate to carry debt beyond the useful life of whatever good or service was purchased with the debt,” says Thomas Donnelly, a certified financial planner and founder of Calamus Financial Planning in West Hollywood, California. “A 30-year loan works for a house because the house will be in use for the duration of the loan, whereas a 30-year loan on an automobile would be ludicrous. … Here, where the good or service is immediately used up, [so] there is no justification for financing the purchase, even over the short term,” Donnelly says.
Donnelly recommends that millennial clients save up three to six months of living costs for unexpected expenses rather than taking out a loan for travel services. But what if a situation like a family funeral requires a last-minute ticket and you don’t have time to save up?
“In the case of a funeral, millennials often have other family members who have the ability and willingness to loan money under much more favorable terms,” says Deborah Meyer, a certified public accountant and certified financial planner with WorthyNest, a fee-only financial planning firm based in greater St. Louis. CheapAir.com’s financing program with Affirm is like an installment loan, and depending on your situation, you may be able to secure a personal loan from a family member or elsewhere at a lower rate, Meyer says.
Or, if that’s not an option and you have good credit, you might qualify for a low or no interest credit card offer. However, revolving credit can prove problematic if you’re only making minimum payments, miss a payment or add to your balance without paying it down.
[See: 12 Habits to Help You Take Control of Your Credit.]
Despite these caveats, John “Johnny Jet” E. DiScala, founder of travel website JohnnyJet.com, predicts that other travel booking sites may add financing options in the future. “If this proves to be popular, you can bet the other [travel booking sites and airlines] will follow,” he says. “I’m sure they’re keeping a close eye.”
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