One of the most crucial financial tasks that one should never ignore is saving for your child's future as soon as conceivable. Higher education typically entails high costs and the requirement for an education loan, which is why parents typically choose this approach. A student may apply for such a loan at a public or private bank or even a non-banking financial company (NBFC), but there are 4 key facts regarding your education loan that lenders won't disclose, which might put you in financial trouble. Mr Ankit Mehra, CEO and Co-founder of GyanDhan, said regarding the same that “With the rising cost of education, funding higher education has become a difficult task for most students. Unless parents have built a considerable corpus of funds for their child’s higher education, student loans are the best option to finance higher studies. Inarguably an easy source of funds, loan seekers should be aware of the nuances of student loans which a lender might not disclose to their customers.”
According to Ankit Mehra, below are some points that borrowers should look out for when applying for an education loan.
1. Credit history and credit score: Credit history is the record of the borrower’s financial habits demonstrating repaying debts and other financial information. Based on these habits, a credit score is assigned to the borrower. Lenders use the credit history and credit score to determine the interest rate and the terms of the loan for the borrower. Any delinquency, delay, default, or loan settlement negatively affects the borrower’s chance of a better loan deal. Moreover, ongoing loans also impact the credit score of the borrower.
2. Charges that affect the loan cost: There are certain charges that a borrower incurs when applying for an education loan. Most of these charges are informed to the borrower upfront when they apply for the loan, however, the extent of its impact might not be clear to the borrower. Processing fees are a standard charge for every student loan. Public banks charge a fixed amount that is lower than the fee charged by private banks and NBFCs. In secured education loans, borrowers also pay property evaluation charges along with the lawyer’s fees.
3. Tax benefits: If the student has already taken an education loan before, they are aware that interest payments are a burden. An easy way to reduce the burden of interest payments is by applying for various tax benefits and government schemes. There are a few schemes launched by the government, such as Padho Pardesh, Dr. Ambedkar Central Sector Scheme, and Central Sector Scheme of Interest Subsidy. Students should also explore tax benefits under Section 80E of the Income Tax Act of India. A point to note, tax benefit under Section 80E is available only when the loan is applied for from a select few lenders, mainly public sector banks.
4. Type of interest rate available: There are two types of interest rates available when taking a loan - a floating rate of interest and a fixed rate of interest. A floating interest rate changes periodically according to economic conditions. A fixed interest rate remains the same throughout the loan tenure. Each has its pros and cons:
a. Since a floating interest rate changes with market conditions, a revision in the rate might lower the rates, which then benefits the borrower. However, borrowers can also witness an interest rate hike, which then leads to an increase in the EMI.
b. A fixed rate of interest does not undergo any change, and therefore, any increase or decrease in the rate does not impact the borrower. In the case of an increase in the rates, the borrower is protected from an increase in the monthly installments. However, they also do not benefit when the interest rates are decreased.
These are some of the things that a lender might not explicitly explain to a borrower unless asked. However, these are key points that borrowers should not overlook, as they will help them save money in the long run.
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