Student loans provide a lifeline for many aspiring students, enabling them to pursue courses which are too costly otherwise. However, opting for an education loan is a very gigantic financial decision that they must take carefully. One small mistake, like ignoring the high interest rate, can lead to a lifetime of regret and high EMIs. Therefore, it is crucial to ask the right questions to ensure you’re making an informed decision before applying for a student loan. Understanding the terms and conditions, interest rates, repayment options, and potential impact on your future finances can make a world of difference. This article presents 10 vital questions to ask before taking out a student loan, providing you with the knowledge and confidence to go ahead with the right education loan. All those who are planning to apply for a loan must ask these questions to your loan officer before signing any documents!
Q1. Is my Course Eligible for the Education Loan?
When you apply for an education loan, it is important to ask whether your course is eligible for a study loan. This way, you can avoid rejection and start looking for alternative ways to fund your education, like scholarships. Usually banks and other financial institutions provide loans to students who pursue a job-oriented course which is taught in full-time mode. Therefore, students who pursue BTech will get a bank loan for education easily while those who are pursuing a one or two-year diploma may have to face rejection.
Q2. How Much is the Interest Rate?
This is a very important question to ask because the interest rate of your education can disturb your finances when you get a job. You must make sure that the bank you choose for an education loan is offering you the best interest rate. You can also ask for an interest rate from multiple banks and then compare to find which one is the best.
There are two types of interest rates that banks can charge and both of them keep changing as per the market. The first is the floater interest rate which is calculated by factoring in the current repo rate plus the spread. The spread is the value which the bank calculates using its own metrics which depends on the risk factor of the applicant. If the repo rate is 5% and the spread value comes to 3%, then the effective interest rate will be 8% per annum.
The second type of interest rate is fixed interest. In this, the applicant gets a fixed interest rate, which does not change during the duration of the education loan. It may sound like a great way to avoid increased interest rates during the loan duration, but there is a loophole in it. If RBI decreases the repo rate to give a boost to the Indian economy, you will not benefit from it and your rate of interest will remain the same.
This is the reason why you should ask for the interest rate for your education loan and carefully decide which type of interest you would like to opt for.
Q3. What Can I Do to Reduce the Loan Interest Rate?
It is possible to make your education loan application strong enough so that the bank charges you a lower interest rate. However, the loan officer will not eagerly tell you this unless you ask. To achieve lower interest rates for your study loan, you need to show your academic excellence; for example, if you have scored really well in classes 10 & 12, then make sure to attach all the required documents. Also, if you provide the bank with a valuable asset whose value far exceeds the loan amount, then your interest will be lower. Last but not the least is the co-signer’s financial health. Your co-signer should be earning enough to cover your loan EMI and any other EMI that he already has in his name. Also, he should have a neat and clean financial record, which means a good CIBIL score, low loan enquiries, no loan default in the past, etc.
Q4. Is There Any Limit for Loan Amount?
Imagine you got admission to MBBS and you urgently need ₹35 lakhs loan amount for your education. You go to your nearest bank and start filling out the loan application. However, in the middle of it you find out that the maximum they can offer you is ₹7.5 lakhs! That would waste your time and energy. That is why it is your priority to ask for the maximum and minimum loan amount and decide whether your educational needs will be met with it or not.
Most banks have separate education loan schemes for students who pursue education in premier institutes or courses like MBBS, which cost in lakhs. You can ask the loan officer for such schemes and fill out the form accordingly.
Q5. What Expenses are Covered by the Education Loan?
When you are about to apply for an education loan for your studies in India or abroad, it is important to ask for the expenses that will be covered by the study loan. This is because if you get a chance to study in the USA but the loan does not cover your travel expenses, then you will have to pay lakhs just to buy flight tickets!
Typically, an education loan covers all your educational expenses during the course period. College fees, hostel fees, mess charges, and travel expenses to pay for your equipment and laptop are all covered in your education loan. In addition, if you have ongoing medical or life insurance, then the premium for such insurance can be paid using the education loan! However, you must provide valid and original receipts of such expenses or authorised fees structured by your college to get your loan sanctioned.
Q6. Do I Need a Collateral for the Student Loan?
Whether you need collateral for a student loan depends on the lender and the loan amount. Collateral is something valuable (like property) that you pledge to the lender to secure the loan.
For instance, when Sneha wanted to pursue her MBA but didn’t have enough savings, she applied for a student loan. Since her loan amount was high, the bank required her parents to pledge their house as collateral. However, smaller loan amounts often don’t require collateral. Check with your bank or lender for their specific requirements.
Listed below are some of the movable and immovable things that you can pledge as collateral:
- A house
- A shop
- A vehicle
- A piece of land
- Bank fixed deposit or recurring deposit
- Your pension of NPS amount
- Gold or valuable jewellery
Q7. What are the Repayment Terms & Conditions?
When it’s time to repay the loan, the terms and conditions of your student loan can surprise you. But if you ask this question when taking the loan, then you can plan your repayment journey wisely. The repayment of the study loan starts after the moratorium period ends. The moratorium period is one year or six months plus your course duration. After your course ends, the banks give you a loan repayment holiday of six to twelve months to find a job or start a business. Once the moratorium period ends, the EMIs start, and you need to pay them every month to avoid additional charges.
Q8. Do I Need a Co-signer for the Student Loan?
Yes, most education loans require you to have a co-signer who can help you pay back the loan if you are unable to do so. However, you can not make anyone your co-signer. He or she must be your blood relative or your legal guardian to co-sign a study loan with you. It is also important to know that carefully choosing your co-signer is crucial for your loan application’s success. If your co-applicant’s credit history is bad or his income is low, then there is a very high chance that your loan application will be rejected during the loan underwriting process.
Q9. What are the Extra Charges That I Need to Know About?
Every education loan has some extra charges that the applicant needs to pay. Some of these charges are described below:
- Loan processing fees – The bank will charge you a fixed amount or a percentage of the total loan amount as processing fees.
- Margin charges – A certain percentage of your total loan amount will be charged as a margin by the bank, which will be used to repay your loan when the EMI starts. It’s a type of advance loan repayment that the customers must do during loan processing.
- Late loan repayment charges – The bank will add extra fees on your next EMI if you make any delay in your current education loan EMI payment.
- Loan pre-payment charges – Imagine you get a hefty bonus at your work then you can use that amount to pre-pay your education loan and close it quickly to save yourself from paying any more interest charges. However, doing so may lead to paying pre-payment charges for a loan.
Q10. What Happens if I Do not Repay the Education Loan?
Upon asking this question, the loan officer will explain to you the consequences of not paying the loan EMI, which usually happens after the failure of three consecutive EMI instalments. For each failed payment, you will get a notification from the bank on your mobile device and email. After the third payment failure, you will get a physical notice via mail, which will notify you that your loan has become an NPS – Non-Performing Asset for the bank. Now, your co-signer will have to make payments on your behalf, but if they do not make payments, the worst-case scenario will happen, which is assent seizing. Your asset, which you submitted as collateral, will be seized by the bank and auctioned off to recover the cost.