From Confusion to Clarity: Making Informed Loan Decisions

Traditional Wisdom Alert: Loans are a bad thing. But fast forward to 2023's EMI-fueled consumer economy, and you must ask yourself as a parent, are educational loans really not good for you? Let's face it, we all work with three types of parents when it comes to studying undergrad abroad: the business parent, the self-made professional, and the high-need family. The financial thinking and challenges that each one faces are different and such must be our counsel.

Of course, securing a study loan in India to pursue education overseas can pose a formidable challenge, primarily due to the numerous intricate terms and conditions associated with it. Understanding the terms and conditions of education loans for study abroad is crucial to avoid unexpected financial burdens, as counselors its our role to put the parents on the right path as they think about these loans. Below are 8 key factors that you should be aware of when having a conversation with parents about educational loans.

1. Interest Rate: The majority of education loans typically come with variable interest rates, making it essential to grasp the idea behind these rates. Borrowers should remain vigilant, as financial institutions might sometimes present the interest rate as simple interest during the moratorium period, only to switch it to a compounding interest rate afterward. It's crucial to ask about the frequency of compounding, whether it occurs daily or monthly, as higher compounding frequencies can significantly increase the overall cost of the loan.
2. Moratorium Period: The moratorium period, which commences from the loan approval date and extends further beyond graduation, serves the purpose of granting students a grace period. This window of time allows them to establish themselves, secure employment, and begin earning income before embarking on loan repayment. Nonetheless, it's important to highlight that the majority of undergraduate students do not benefit from a moratorium period and are required to initiate loan repayment right away. Typically, the Equated Monthly Installment (EMI) applies solely to the disbursed loan amount until the final calculation cycle, a structure that tends to be advantageous for financial institutions.
3. Loan Tenure: Drawing from industry experience, we've observed that education loan durations typically span from 6 to 8 years. From our standpoint, longer loan durations are preferable, as long as there are no penalties for foreclosure or partial payments.
4. Prepayment and Foreclosure Charges: As per the directives set by the Reserve Bank of India (RBI), there are no fees for closing out or making partial early payments on education loans. Nevertheless, it's crucial to understand that these regulations do not extend to Non-Banking Financial Companies (NBFCs). Hence, it's imperative to ascertain the classification of your lender as either an NBFC or a bank. One commonly misconstrued entity is HDFC Credila, which, despite its name, is not affiliated with HDFC Bank; instead, it operates as an NBFC.
5. Maximum Loan Limit: The highest loan amount available can fluctuate depending on factors like the student's chosen destination country, university, the category of the course, and the financial stability of the co-borrower. Often, students compare their loan limits with those of their peers and end up feeling disheartened. It's vital to understand that pledging collateral doesn't automatically guarantee a greater loan limit. While higher limits may be attainable if your financial situation inherently supports it, having substantial collateral but low or no income won't necessarily secure a substantial loan. To obtain a substantial education loan, it's crucial to maintain a solid financial track record and demonstrate a healthy income on paper.
6. Disbursement Frequency: Is the loan disbursement structured to match your term-specific needs, or is it a lump-sum disbursement? In situations where students can't obtain an education loan, some may consider alternatives like Loan Against Property (LAP) or Loan Against Security (LAS), both of which provide the entire loan amount upfront. These loans are renewed on an annual basis, and processing fees are incurred with each renewal.
7. Disbursement Recipient: Various disbursement methods encompass sending funds directly to the university, transferring them to the co-borrower's account, or depositing them into the student's account. When funds are disbursed to the university, there may be extra expenses involved, such as Forex fees, which banks typically disclose at a later stage.
8. Covering Past Dated Payments: Banks typically accommodate payments that are overdue by up to the previous six months, although there's room for negotiation if the borrower's financial standing is robust. Regarding Tax and TCS Advantages under Section 80E: Does your loan incorporate the benefits offered by Section 80E for tax deductions and TCS (Tax Collected at Source) advantages? It's crucial to confirm that these aspects are included in your loan agreement. While all banks are legally obligated to provide these benefits, most Non-Banking Financial Companies (NBFCs) assert that none of their former students have encountered difficulties in claiming these advantages. However, it remains a somewhat uncertain area when dealing with NBFCs.