The stress associated with getting a loan and then paying it back can be substantially cut down if you plan well and understand the factors associated with the education loan, says Adhil Shetty
Education costs are spiraling, and education loans are the best hope on the horizon for pursuing higher education in reputed universities and institutes. They take care of the fees/tuition expenses and also come at a lower interest rate than personal loans. So it is no wonder that education loans are becoming very common.
Technology has made applying for education loans very simple. You can apply online to up to three banks at a time through the Vidya Lakshmi portal. However, every loan needs to be paid back. The stress associated with getting a loan and then paying it back can be substantially cut down if you plan well and understand the factors associated with the education loan.
Know your eligibility
To be eligible for a loan, you have to be of Indian origin, between the age of 16-35 years and pursuing a degree. In certain situations, you have to have a verified admission in a university. A loan of more than Rs 7.5 lakh requires a security deposit. A co-applicant, a closely related family member, is a necessity.
Know your margin
Not all banks can provide hundred per cent credit on the education expense. Often, there may be a margin associated with the loan. A loan with zero margin will take care of the full tuition fees applicable, accommodation/hostel charges, exam fees, library fees, books and equipment including laptops, travelling expenses abroad and other such reasonable expenses required to complete the course. However, if there is a margin of 10-20 per cent, you may have to arrange additional funds out of your savings yourself.
Know your interest
Always research to know the interest rate chargeable on the loan amount -- whether it is fixed or will change according to market values, and by how much. Always compare interest rates and terms and conditions from various banks before you decide on a bank.
Understand your repayments
Banks provide a substantial period as a moratorium before the borrower starts making repayments. You do not need to start your repayments during your entire course span as well as for some more time post that. The moratorium or waiver period varies from bank to bank and you are better off checking with your bank about the waiver period before planning your education loan repayment.
However, keep in mind that banks start charging the interest on education loans immediately and not wait until the waiver period ends. So the longer you wait to begin the repayments, the higher interest you would be paying.
Understand the penalties of defaulting
The education loan interests are not low. Defaulting on loans would increase your loan burden substantially. So it is best to begin repaying your loan as soon as possible without utilising the moratorium period to keep the interest rates to the minimum. In case you actually end being unable to pay your education loan, you will be starting your career with a poor credit record and would be ineligible for further loans.
Not just you but your family, who are your guarantor, could be held responsible and their assets will be used to clear your liabilities.
Apart from these key points, make sure you always keep a record of all the documents received from the bank in regards to the loan. Always make it a point to read, research, and finally ask the bank about all the key terms, especially regarding the interest and repayment until you are sure you understand everything clearly before you sign the dotted line.
Key points to remember:
- Taking a loan is easy, but repaying it is not so. Plan ahead, know your finances, and do not default
- Never borrow more money than what you can pay back
- Make sure you are comfortable with the loan tenure
- Pay on time and avoid being a defaulter
- Always compare the interest rates and other terms and conditions
- Read the documents carefully and always keep a record
Illustration: Uttam Ghosh/Rediff.com
The author is CEO, BankBazaar.com
